We often get asked questions about qualifying and what payments need to be included, especially when the person has an Installment Debt that will be paid off that year. Buying a home, and getting a mortgage is going through one of those periods of time where Agencies (Fannie and Freddie) are now OK with debt ratios of 50%, however the PMI companies don’t want to go over 45%. The total Debt to Income Ratio requirements for a home loan varies vastly based upon the Program Type.
When we have these moments of change, how we calculate your ratios can make the difference between buying the home of your dreams, or having to settle for something else. Because you might pay off a student loan debt, a boat or a car, and you only have 8 months left (for instance)…the question becomes, exactly what debts do we use to qualify someone in that situation?
For a mortgage loan, many people are often surprised that we only count child care for Veterans. It’s a hefty debt for most, but one that will significantly vary, and eventually be eliminated in some cases when the child grows older. If the Agencies are that “understanding” for this type of debt, why then do we make someone who only has 5 or 6 months left on a car before you have the title in hand qualify with that payment?
We now have definitive guidelines for those with 10 months or less in payments left on an installment loan, broken down by loan type. This will continue to be important for those of us who are paying off Student Loans, as in some cases, we are now required to count 1% (or .5%) of the balance as we qualify someone on some mortgage programs.
Fannie Debt to Income Ratio Requirements
Fannie Mae now allows for a total ratio of 50%. This includes the payment for the new home, plus all other debt reporting to a credit bureau.
When there are 10 or less recurring monthly payments remaining on an installment debt and if the monthly payment doesn’t significantly affect the borrower’s ability to meet all obligations, Fannie will allow us to exclude the monthly payment.
Note: When DU determines the monthly payment to be insignificant, it will automatically omit the debt from the ratios.
Student Loan Debt that is in IBR or Deferred Status: If we can establish an IBR Payment amount on a Credit Report, we can qualify you on that payment for a Conventional Fannie Mae loan. Fannie Mae is now (effective January of 2018) the only alternative for those who are buying a house with student loan debt in IBR Status.
Freddie Debt to Income Ratio Requirements
Freddie Mac now allows for a total ratio of 50%. This includes the payment for the new home, plus all other debt reporting to a credit bureau.
When there are 10 or less monthly payments remaining on an installment debt and if the monthly payment doesn’t significantly impact the borrower’s ability to meet all expectations, Freddie will allow us to exclude the monthly payment.
Student Loan Debt that is in IBR or PAYE Status: New guidelines came into place as of January 2018 requiring a level payment verification on all student loans, OR .5% of the student loan debt be counted in your ratios. In all of these Student Loan scenarios, if you can show that someone else has been paying your student loan debt for 12 months from an account that you are NOT on, we will not count it against you.
FHA Debt to Income Ratio Requirements
For Automated Approvals you can have ratios near 50%. This includes the payment for the new home, plus all other debt reporting to a credit bureau. If you have lower credit scores, and require a manual underwrite for the loan, you are capped at 41% ratios.
Closed end debts which will be paid off within 10 months may be excluded as long as the cumulative payments of all such debts are less than or equal to 5% of the borrower’s gross monthly income.
The borrower may not pay down the balance(s) in order to meet the 10-month requirement.
Student Loan Debt that is in IBR or Default Status: The NEW FHA Guidelines state that if the ACTUAL Deferred Student Loan payment is $00.00 then we are required to count 1% of the Balance as a payment amount. If the ACTUAL Payments are not equal amounts, meaning they are Income based, or PAYE – we must count 1% of the balance.
USDA Debt to Income Ratio Requirements
Short term installment obligations, 10 months or less, may be excluded as long as the monthly payment doesn’t have a significant impact on the borrower’s repayment ability. A significant impact is defined as 5% or greater of the monthly repayment income of the borrower(s).
Installment accounts may be paid down to a repayment balance of 10 months or less, however, we must include any debt considered to be a significant impact to the borrower’s ability to repay the debt.
Student Loan Debt that is in IBR or Default Status: Deferred student loans that are not in repayment status must use an estimated payment of 1% of the loan balance, or a verified fixed payment provided by the loan Servicer to document the payment that will be due.
VA Debt to Income Ratio Requirements
Installment accounts with less than 10 months repayment remaining, may be omitted as long as the required payments aren’t so large as to cause a severe impact on the family’s resources for any period of time. This means, if the monthly payment is 2% or more of the borrower’s monthly income, we will need to include the payment in the ratios.
Installment accounts may be paid down to a repayment balance of 10 months or less.
Student Loan Debt that is in IBR or Default Status: VA does not make us count student loans that are in deferred or forbearance. You need to have 12 months left before it’s due to change.
Good to Know:
Lease payments are not considered as installment or closed end debts and must be included in the ratios regardless of the number of monthly payments remaining.
Mortgage approval with deferred student loans or short-term debt, right now, can be like working a really really hard Sudoku puzzle – it takes someone who REALLY knows Program Requirements to be able to look at your overall debt to income ratio and find the right program for you. We want to help you get the numbers to work. We deal with SOOO many folks who have various types of deferred student loans, and unusually debt situations, that we know what WILL work, and what won’t. Call Steve and Eleanor Thorne 919 649 5058 and get Pre-Qualified today!