Obligations Not Considered Debt

Collateralized loans secured by depository accounts or financial assets are not considered debt for qualifying purposes. This includes loans secured by certificates of deposit (CDs) or other cash accounts where the borrower is essentially borrowing against their own money. The rationale is that repayment can be obtained by extinguishing the asset if necessary. Because the loan is fully secured by a liquid asset already owned by the borrower, the FHA does not require the monthly repayment obligation to be included in the debt-to-income ratio calculation.

Insurance premiums, other than property insurance, are not considered debt. This includes premiums for life insurance, auto insurance, and health insurance. While property insurance (Hazard and Flood insurance) is a mandatory part of the monthly housing expense (PITI), other personal insurance policies are viewed as voluntary or living expenses. Therefore, the monthly premiums for these non-housing insurance policies are not included in the borrower’s total fixed payments when calculating the debt-to-income ratio. This allows borrowers to maintain necessary personal protections without negatively impacting their mortgage eligibility.

Federal, state, and local taxes are generally not considered debt, provided they are not delinquent and no specific payments are required. This exclusion applies to standard tax withholdings and annual tax liabilities that are paid in the normal course of filing returns. However, this rule changes if the taxes are delinquent; in that case, they become a debt. But for a borrower who is current on their tax obligations, the standard tax liability is not added to the monthly debt service for the purpose of calculating the debt-to-income ratio.

Open accounts with zero balances are not considered debt for FHA underwriting. While these accounts appear on the credit report and contribute to the borrower’s credit utilization and history, they do not create a monthly payment obligation if there is no outstanding balance. The FHA is concerned with the borrower’s actual monthly liability, not their potential to borrow. Therefore, if a credit card or line of credit is open but has a zero balance at the time of underwriting, no monthly payment is included in the debt-to-income ratio calculation.

Union dues are explicitly listed as an obligation not considered debt under FHA guidelines. Although these dues are often automatically deducted from a borrower’s paycheck and may be a requirement for maintaining specific employment, they are not treated as a liability in the debt-to-income calculation. Lenders review pay stubs to verify net income and employment stability, but the specific deduction for union membership does not reduce the borrower’s qualifying income or add to their monthly debt burden. This policy helps ensure that workers in unionized industries are not penalized for professional membership fees.

Commuting costs, including gas, tolls, public transit fares, and vehicle maintenance, are not considered debt in FHA underwriting. These expenses are viewed as daily living costs associated with employment rather than contractual credit obligations. Even though high commuting costs can impact a household’s disposable income, the FHA does not require lenders to estimate or deduct these expenses when calculating the debt-to-income ratio. This exclusion applies regardless of the distance the borrower travels for work, provided the employment income itself is considered stable and effective for qualifying purposes.

Voluntary deductions from a borrower’s paycheck, such as contributions to a 401(k) retirement plan, savings accounts, or United Way donations, are not considered debt. FHA guidelines specifically list “Federal Insurance Contributions Act (FICA) and other retirement contributions” as obligations excluded from the debt ratio. Because these deductions are voluntary and can generally be stopped or adjusted by the borrower if financial hardship arises, they are not viewed as fixed liabilities. Consequently, these contributions do not negatively impact the borrower’s debt-to-income ratio, allowing the borrower to continue saving for retirement without reducing their mortgage qualification amount.

Utility bills, such as electricity, water, gas, and waste disposal, are not considered debt for FHA underwriting. These costs are categorized as variable living expenses rather than fixed recurring debts. While the projected housing payment (PITI) includes principal, interest, taxes, and insurance, it does not include the cost of utilities required to run the home. Therefore, even though a borrower must budget for these services to maintain the property, the FHA does not require lenders to count these projected costs against the borrower’s debt-to-income ratio when determining eligibility for a mortgage.

Child care expenses are classified as “obligations not considered debt” for FHA loan underwriting purposes. Although child care can be a significant monthly expenditure for families, it is viewed as a living expense rather than a contractual liability or debt obligation. Consequently, underwriters do not include child care costs when calculating the borrower’s total fixed payments to effective income ratio (DTI). While the lender verifies income and other debts, the cost of daycare or after-school care does not reduce the borrower’s borrowing power in the same way a car loan or credit card payment would.

Medical collections are explicitly listed as obligations not considered debt under FHA underwriting guidelines. Unlike other collection accounts, which may require the underwriter to calculate a monthly payment (often 5 percent of the outstanding balance) if the cumulative total exceeds $2,000, medical collections are exempt from this calculation. Because these accounts are excluded, borrowers do not need to pay them off or establish a payment plan to qualify for an FHA loan. The FHA recognizes that medical debt often arises from unforeseen emergencies rather than credit mismanagement, distinguishing it from standard consumer credit obligations.