Specific Debt Types Explanation To Be Included in the Calculation of Total Monthly Obligations

Garnishments mandated by a court order must be included in the borrower’s recurring monthly debt obligations if the obligation is expected to continue for more than 10 months. Because these payments are involuntarily deducted to satisfy a debt, they directly reduce the income available to service a mortgage. The lender must verify the terms of the garnishment order to determine the remaining duration. If fewer than 10 months remain, the payment may potentially be excluded, similar to installment debt, unless the payment amount is significant enough to affect the borrower’s ability to pay the mortgage.

Yes, business debts that appear on a self-employed borrower’s personal credit report can be excluded from the DTI calculation if specific evidence is provided. The borrower must demonstrate that the debt is paid by the business, typically by providing 12 months of canceled company checks or business bank statements showing the payments. Furthermore, the lender must ensure that the business cash flow analysis reflects these payments as business expenses. If the debt payment is already accounted for in the business’s expenses, counting it in the personal DTI would effectively double-count the liability, so exclusion is permitted provided there is no history of delinquency on the account.

Bridge loans, often used to access funds from a current home to purchase a new one before the current one sells, create a contingent liability. Generally, the payment on the bridge loan must be included in the borrower’s recurring monthly debt obligations. However, this requirement can be waived if the borrower provides a fully executed sales contract for their current residence and confirmation that all financing contingencies have been cleared. In such cases, the lender may exclude the bridge loan payment from the DTI calculation because the debt is expected to be paid off imminently upon the sale of the prior home.

When the mortgage transaction involves a property that also has a Home Equity Line of Credit (HELOC), the monthly payment on that HELOC must be considered a recurring monthly debt obligation. If the HELOC has an outstanding balance, the lender must use the payment amount indicated on the credit report or loan agreement, whether it is a principal and interest payment or an interest-only payment. However, if the HELOC has a zero balance and no payments are currently required, the lender is not required to impute a payment or include it in the Total Monthly Obligations calculation.

Authorized user accounts may be excluded from the debt ratio if the borrower is not the primary obligor and certain conditions are met. To exclude the debt, the lender typically needs evidence that another borrower on the mortgage owns the account or that the primary account holder is the borrower’s spouse. Alternatively, if the borrower can provide written documentation, such as canceled checks, proving that another party has been the sole payer of the monthly payment for the last 12 months, the debt may be excluded. If these conditions are not met or if the borrower cannot document they are not responsible, the payment is included.

Alimony, child support, or separate maintenance payments must be treated as recurring monthly debt obligations if the borrower is legally mandated to make them and the obligation will continue for more than 10 months. The lender must obtain written legal documentation, such as a divorce decree or separation agreement, to confirm the amount and duration of the liability. Voluntary payments that are not legally required are generally not included. However, for alimony payments specifically, lenders often have the option to treat the payment as a reduction of the borrower’s qualifying income rather than as a monthly debt liability in the DTI ratio.

Revolving charge accounts and unsecured lines of credit are considered long-term debts and must be included in the borrower’s recurring monthly debt obligations. If the credit report shows a required minimum monthly payment, that specific amount is used for the calculation. However, if the credit report does not specify a minimum payment amount, the lender cannot assume the payment is zero. In such cases, the lender must impute a payment amount, typically using 5% of the outstanding balance or, for certain automated underwriting systems, the greater of $10 or 5% of the outstanding balance to ensure the liability is adequately covered.

Yes, lease payments must always be included in the Total Monthly Obligations, regardless of how many months remain on the lease agreement. Unlike installment loans, the “10-month rule” does not apply to leases. This strict inclusion is because the expiration of a lease—whether for a vehicle or rental housing—typically necessitates a replacement transaction. Lenders operate under the assumption that the borrower will either enter into a new lease, buy out the existing lease, or purchase a replacement vehicle or home, thereby continuing the monthly financial obligation indefinitely into the future.

Lenders must include a monthly payment for student loans in the DTI calculation, even if the loans are in deferment or forbearance. If the credit report shows a monthly payment amount, that amount is used. If the credit report reflects a $0 payment, the lender may use that $0 amount only if it is associated with an income-driven repayment plan documented by the student loan provider. If no payment is reported or if the loan is in deferment without a documented payment plan, the lender must impute a payment, typically calculated as 1% or 0.5% of the outstanding loan balance, depending on the specific loan program.

Generally, installment debts such as auto loans or personal loans are included in the Total Monthly Obligations if they have more than 10 months of payments remaining. However, there is a crucial exception to this “10-month rule.” If the remaining payments are fewer than 10 months but the monthly payment amount is substantial enough to significantly impact the borrower’s ability to meet other credit obligations, the debt must still be included. Additionally, installment debts secured by virtual currency must always be included in the calculation, regardless of the number of months remaining on the term.