Monthly Obligations Excluded

Generally, standard living expenses are not included in the debt-to-income (DTI) ratio calculation for FHA loans. The FHA distinguishes between contractual debts and discretionary or necessary living costs. Obligations such as utility bills, commuting costs, child care expenses, and union dues are explicitly listed as “obligations not considered debt.” Additionally, voluntary deductions from your paycheck, such as automatic contributions to savings accounts or insurance premiums (other than property insurance), are excluded. These expenses are viewed as part of your residual income consumption rather than fixed liabilities that threaten your ability to repay a mortgage.

Installment debt, such as a car loan or student loan, typically counts toward your DTI. However, there is a specific exception for short-term debts. If an installment loan has fewer than 10 months of scheduled payments remaining, it may be excluded from your monthly obligations. There is a catch: the cumulative monthly payment of all such excluded debts must not exceed 5 percent of your gross monthly income. Importantly, you cannot simply prepay a loan down to fewer than 10 months to qualify; the loan must naturally have fewer than 10 months remaining at closing to be eligible for exclusion.

Loans secured by financial assets, such as 401(k) accounts or certificates of deposit, are generally excluded from monthly debt obligations. The rationale is that the borrower is essentially borrowing their own money, and if they fail to repay, the lender can simply reclaim the collateralized funds (the asset itself) to satisfy the debt. Because these loans are self-secured, the monthly repayment obligation is not counted against the borrower’s DTI. However, the assets used to secure the loan cannot be counted toward the borrower’s required reserves or funds to close.

Co-signed loans are considered “contingent liabilities” because you are legally responsible if the primary borrower defaults. However, this debt can be excluded from your DTI if you can prove you are not the one paying it. To qualify for this exclusion, you must provide documentation showing that the primary obligor (the other party) has made the payments for the last 12 consecutive months. The account must also be current with no history of delinquency during that period. Acceptable evidence usually includes cancelled checks or bank statements from the co-obligor.

Yes, business debt that appears on your personal credit report can be excluded if you can demonstrate that the business pays the debt, not you personally. To exclude this obligation, you generally need to provide documentation showing that the business has paid the debt for the last 12 months (e.g., via cancelled business checks). Furthermore, the debt must be considered in the cash flow analysis of the business. This ensures that the business generates enough income to cover the debt without relying on your personal income, justifying its removal from your personal ratios.

Medical collections are treated differently than other types of derogatory credit. Under FHA guidelines, collection accounts specifically identified as medical are listed as “obligations not considered debt.” While other collection accounts might require the lender to calculate a monthly payment (often 5 percent of the outstanding balance) to be included in the DTI if the cumulative balance is high, medical collections are generally exempt from this requirement. This policy recognizes that medical debt is often involuntary and does not necessarily reflect the same credit risk as other forms of consumer debt.

Debts assigned to an ex-spouse through a court order, such as a divorce decree or separation agreement, can often be excluded from your monthly obligations. If the court order explicitly instructs the other party to pay a specific debt, you generally do not need to show a 12-month payment history to remove it from your DTI, unlike a standard co-signed loan. You simply need to provide a copy of the divorce decree or court order. However, this exclusion typically requires that the decree effectively releases you from the financial responsibility in the eyes of the underwriter.

Authorized user accounts—credit cards where you are authorized to use the account but are not the primary account holder—are usually included in your DTI unless an exception applies. To exclude an authorized user account, you must provide documentation evidencing that the primary account holder has made all required payments for the previous 12 months. If the account has been open for less than 12 months, or if the payment history is spotty, the lender may be required to count the monthly payment toward your debt ratio, affecting your borrowing power.

Open accounts with a zero balance are explicitly listed as obligations not considered debt. Even though you have access to credit on these accounts, they do not create a monthly liability until a balance is carried. Therefore, credit cards or lines of credit that show a zero balance on your credit report are not included in the calculation of your monthly debt obligations. This allows borrowers to maintain available credit for emergencies without it negatively impacting their debt-to-income ratio during the loan underwriting process.

Federal, state, and local taxes are generally not considered debt if they are not delinquent and no specific payments are required. This means standard annual tax liabilities that you pay when filing returns do not count as a monthly debt. However, if you have delinquent tax debt, it becomes a liability. Delinquent taxes can only be excluded from valid debt obligations if the borrower has entered into a valid repayment agreement with the taxing authority and has made at least three months of timely scheduled payments prior to the loan application.