A borrower’s debt-to-income ratio or DTI is an important calculation the lender must make when processing an FHA home loan application. Your monthly debts, compared to your lender-verified income, will help determine your acceptability as a credit risk and your ability to pay your mortgage. But how does the lender process your debt information to arrive at the ratio?
HUD 4000.1 establishes guidelines for the lender to follow in order to establish the borrower’s DTI. On pages 249 and 250 we find the following:
“The Mortgagee must determine the Borrowers monthly liabilities by reviewing all debts listed on the credit report, URLA, and required documentation. All applicable monthly liabilities must be included in the qualifying ratio.”
Some types of debt may be omitted by the lender in certain cases. For example, “Closed-end debts do not have to be included if they will be paid off within 10 months and the cumulative payments of all such debts are less than or equal to 5 percent of the Borrowers gross monthly income. The Borrower may not pay down the balance in order to meet the 10-month requirement.”
There are also requirements for situations where the borrower is listed on an account but does not use that line of credit. “Accounts for which the Borrower is an authorized user must be included in a Borrowers DTI ratio unless the Mortgagee can document that the primary account holder has made all required payments on the account for the previous 12 months. If less than three payments have been required on the account in the previous 12 months, the payment amount must be included in the Borrowers DTI.”
That is one reason why it can be very important to consider what you are a co-signer or a co-borrower for prior to applying for a home loan-there is potential for such accounts to be a liability for the borrower if payments aren’t made on time, especially for the 12 months leading up to the FHA mortgage loan application.
HUD 4000.1 adds, “Loans secured against deposited funds, where repayment may be obtained through extinguishing the asset and these funds are not included in calculating the Borrowers assets, do not require consideration of repayment for qualifying purposes.”
With the rules in this section, additional lender standards may apply, so it’s best to discuss your situation with a loan officer if you aren’t sure whether a given issue related to DTI might affect your application.
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