Debt included in monthly liabilities

FHA guidelines specify several types of obligations that are not considered debt for qualifying purposes. These include medical collections, federal, state, and local taxes (provided they are not delinquent and no payments are required), and automatic deductions from savings not associated with another obligation. Additionally, voluntary deductions such as 401(k) retirement contributions, union dues, commuting costs, and child care expenses are excluded. Loans secured by financial assets (like a loan against a 401(k) or savings account) are also excluded since repayment can be made by extinguishing the asset.

A “30-day account” is a credit arrangement requiring the borrower to pay off the outstanding balance in full every month. These accounts are generally not included in your debt-to-income ratio, provided you can verify that you have paid the outstanding balance in full every month for the past 12 months. However, if your credit report reflects any late payments on the account within the last 12 months, the lender must calculate a monthly liability. In this scenario, they will utilize 5 percent of the outstanding balance as your monthly debt obligation for qualification.

When business debt appears on your personal credit report, it must be included in your debt-to-income ratio unless you can prove the business pays it. To exclude this debt, you must provide documentation verifying that the debt is paid out of company funds (typically 12 months of canceled checks). Furthermore, the debt must be considered in the cash flow analysis of your business. If the business tax returns reflect a business expense related to the obligation equal to or greater than the payments, the debt may be excluded from your personal liabilities.

If your credit report shows cumulative outstanding collection account balances of $2,000 or greater, the lender must analyze the debt. You are not necessarily required to pay them off, but a monthly payment must be included in your ratio. If you have a payment arrangement with the creditor, that specific monthly amount is used. If no arrangement exists, the lender calculates a monthly payment equal to 5 percent of the outstanding balance of each collection account. This imputed payment is then added to your monthly debt obligations for qualifying purposes.

A co-signed loan is considered a contingent liability and must initially be included in your monthly debt obligations. However, you can exclude this debt if you verify that the other party is fully responsible for the payments. You must provide documentation evidencing that the co-obligor has made the payments on time for the previous 12 consecutive months. The account must be current with no history of delinquency during that period. If these conditions are met, the lender assumes the other party will continue to pay, and the debt is removed from your qualifying ratio.

Debts for which you are an authorized user are generally included in your debt-to-income ratio unless you can prove you are not responsible for the payments. To exclude these accounts, you must provide documentation, such as canceled checks or bank statements, showing that the primary account holder has made all required payments for the previous 12 consecutive months. If the payment history shows that less than three payments have been required on the account over the past year, the payment amount must be included in your monthly debt obligations regardless of who pays it.

Revolving charge accounts and unsecured lines of credit are treated as long-term debts and must be included in your recurring monthly obligations. If your credit report shows a required minimum monthly payment, the lender will use that figure. If the credit report does not reflect a minimum payment, the lender cannot assume the payment is zero. Instead, they must calculate a monthly payment obligation by using 5 percent of the outstanding balance listed on the account. This rule ensures that potential future payments on these open lines of credit are factored into your affordability analysis.

FHA guidelines require that all student loans be included in the borrower’s liabilities, regardless of the payment status or type. If the credit report or documentation from the servicer shows a required monthly payment greater than zero, the lender uses that actual amount. However, if the credit report indicates a zero monthly payment, the lender must calculate a monthly obligation. In this scenario, the lender imputes a payment equal to 0.5 percent of the outstanding loan balance to ensure a monthly liability is accounted for in the debt-to-income ratio.

Installment loans, such as auto loans, are generally included in your monthly debt obligations. However, there is an exception known as the “10-month rule.” An installment debt may be excluded from the qualifying ratio if it will be paid off within 10 months from the closing date and the cumulative payments of all such debts are less than or equal to 5 percent of your gross monthly income. Importantly, borrowers are strictly prohibited from paying down the balance of a loan solely to reach this 10-month threshold to qualify for the exclusion.

When lenders calculate your debt-to-income ratio, the “front-end” housing expense is a critical component known as PITI. This monthly housing expense includes the principal and interest payments on the mortgage, real estate taxes, and premiums for hazard and flood insurance. Additionally, it includes Homeowners’ Association (HOA) dues, ground rent, leasehold payments, and any special assessments with more than ten months remaining. If there is subordinate financing (a second mortgage) secured by the property, those payments are also included in the total monthly housing expense used for qualification purposes.