10 or Less Instalment Payments Outstanding

Lenders cannot rely solely on a borrower’s verbal statement regarding the remaining term of a loan. The credit report serves as the primary source of documentation to verify the unpaid balance and the monthly payment amount. If the credit report does not reflect the correct number of months remaining or the correct monthly payment—or if the information is missing—the lender must obtain the loan agreement or a current payment statement from the creditor. This documentation must clearly show the outstanding balance, the monthly payment, and the remaining term to justify excluding the liability from the debt ratio.

Deferred installment debt generally must be included in the borrower’s debt-to-income ratio. The 10-month exclusion rule typically applies to debts that are currently being paid and are nearing completion, rather than debts that have not yet begun. For deferred installment debt (excluding student loans), the lender must obtain evidence of the terms and the anticipated monthly payment obligation. If the actual monthly payment is not available, the lender must utilize the terms of the debt or 5 percent of the outstanding balance to establish a monthly payment amount for qualification purposes.

The restriction on the payment amount is cumulative, meaning you must add up the monthly payments of all debts you wish to exclude under the 10-month rule. For example, if you have a furniture loan with 5 months left and a student loan with 8 months left, you cannot look at them individually against the 5 percent income limit. You must combine the monthly payments of both loans. If the total of those payments exceeds 5 percent of your gross monthly income, then the debts cannot be excluded from your debt-to-income ratio, even though both have short remaining terms.

Loans secured by financial assets are treated differently and generally have more lenient exclusions than standard installment debt. Loans secured against deposited funds, such as 401(k) accounts, cash value of life insurance policies, or signature loans secured by verified assets, do not require consideration of repayment for qualifying purposes. This exclusion applies regardless of the number of months remaining on the loan. The rationale is that the borrower can extinguish the debt by liquidating the asset. However, if the asset is used to secure the loan, that specific value cannot be counted toward the borrower’s required reserves.

Timeshare obligations are legally considered installment loans rather than mortgage debts for the purpose of FHA underwriting. As such, they are subject to the same installment debt guidelines,. If a timeshare loan has fewer than 10 months remaining and the monthly payment does not exceed the 5 percent gross income threshold, it may potentially be excluded from the debt-to-income ratio. However, borrowers should be aware that maintenance fees associated with timeshares are often considered separate continuing obligations that might need to be factored into the borrower’s overall monthly liabilities depending on the lender’s specific analysis.

Yes, a lender retains the discretion to include the debt in your ratios even if it technically meets the exclusion requirements. An installment debt with fewer than 10 monthly payments remaining should be treated as a recurring monthly debt obligation if it significantly affects the borrower’s ability to meet their monthly obligations. Underwriters look at the complete financial picture. If removing the debt technically qualifies the borrower but leaves them with dangerously low residual income during those remaining months, the underwriter may decide that the debt represents a material risk and must be counted against the DTI.

Even if an installment loan has fewer than 10 months remaining, it cannot be excluded if the monthly payment is substantial relative to your income. The FHA mandates that the cumulative payments of all debts excluded under this rule must be less than or equal to 5 percent of the borrower’s gross monthly income. If the short-term debt payment exceeds this 5 percent threshold, it must be included in the borrower’s debt-to-income ratio. This prevents a scenario where a borrower is approved for a mortgage while struggling to manage an excessively large, albeit temporary, monthly obligation.

No, the 10-month exclusion rule does not apply to lease payments. FHA guidelines strictly state that lease payments must be included in the borrower’s recurring monthly debt obligations, regardless of the number of months remaining on the lease agreement. This distinction exists because, unlike an installment loan where the debt is extinguished upon the final payment, a lease usually necessitates the return of the vehicle or property. Underwriters assume that a borrower will likely enter into a new lease or purchase obligation to replace the vehicle once the current lease expires, creating a continuing liability.

No, you cannot manipulate your debt profile to qualify for this specific exclusion. FHA guidelines explicitly prohibit borrowers from making a partial prepayment to reduce an installment loan balance to fewer than 10 months solely to qualify for the mortgage. The remaining term must be the natural result of the amortization schedule at the time of closing. However, paying off an installment debt in full prior to or at closing is generally permitted. If you choose to pay the debt in full to qualify, your lender will require documentation proving the source of funds used for the payoff.

When applying for an FHA loan, installment debts—such as auto loans, student loans, or personal loans—are generally counted as part of your monthly recurring obligations. However, there is a specific exception for debts that are nearing the end of their term. If an installment loan has fewer than 10 months of scheduled payments remaining, it may be excluded from your debt-to-income (DTI) ratio calculation. This exclusion is not automatic; it requires that the cumulative monthly payment of all such debts be less than or equal to 5 percent of your gross monthly income to ensure affordability.