This guide covers excluding debts from DTI calculations on debts paid by others. Higher debt-to-income ratios is one of the biggest barriers when it comes to qualifying for home loans. Excluding debts from DTI calculations is similar with all mortgage loan programs. In this blog, we will talk about excluding debts From DTI calculations on FHA loans since FHA mortgages are the most popular loan program for borrowers with high DTI. Many of our viewers of Gustan Cho Associates contact us because they get conflicting answers when it comes to Excluding debts from DTI calculations by various lenders. Excluding debts from DTI calculations is allowed as long as someone else is paying for the debt other than the borrower. In this blog, we will discuss Excluding Debts from DTI calculations for borrowers with higher DTI.
HUD DTI Mortgage Guidelines
The United States Department of Housing and Urban Development (HUD) is the parent of the Federal Housing Administration (FHA). HUD has the most lenient guidelines when it comes to debt-to-income ratio requirements. There are two different types of debt-to-income ratios when it comes to mortgages. The front end debt-to-income ratio is the sum of the proposed housing payment (PITI) divided by the borrowers’ gross monthly income. The back-end debt-to-income ratio is the sum of the PITI (principal, interest, taxes, insurance) PLUS all other minimum monthly payments that report on a consumer credit report, divided by the borrowers monthly gross income. The maximum debt-to-income ratio allowed to get an approve/eligible per automated underwriting system on FHA loans is 46.9% front end and 56.9% back end DTI. Click here for eligible for FHA loans 46.9% front end and 56.9% back end DTI
HUD DTI Manual Underwriting Guidelines
On FHA Manual Underwriting files, the debt-to-income ratios are as follows on FHA DTI Manual Underwrites: 31% front-end and 43% back end with no compensating factors. 37% front-end and 47% back-end with one compensating factors. 40% front-end and 50% back end with two compensating factors. Compensating Factors are positive factors such as low payment shock, additional reserves, income not used to qualify such as documented part-time income, and other positive factors.
Excluding Debts From DTI Calculations and Types of Debts Allowed To Be Exempt
If a borrower has a debt that is under the borrower’s name but someone else is paying for it, it may be exempt from debt to income calculations by mortgage underwriters. The following conditions and terms need to be met when excluding debts from DTI calculations:
The credit tradeline can be under the name of the borrower and someone else can pay for it. This debt will not count if the borrower can provide 12 months of canceled checks or bank statements for the person who has been paying for the debt.
This is very common when a parent will pay for a borrower’s student loan payments. The student loan debt can be excluded from debt to income ratio calculations if they can provide that a parent was paying for the student loan debt. The debt can be under the borrowers’ name and the person paying for the debt does not have to be listed as the co-borrower. The types of debt can be student loans, car loans, mortgages, installment loans, or other debts.
Mortgage Guidelines on Excluding Debts From DTI Calculations
Certain mortgage guidelines allow borrowers to exclude certain debts from their Debt-to-Income (DTI) calculations. The DTI ratio is an important factor in mortgage underwriting, as it helps lenders assess a borrower’s ability to manage their monthly mortgage payments about their existing debts and income. In this guide, we will cover some common debts that may be excluded from DTI calculations under certain circumstances.
Excluding Short-Term Debts From DTI Calculations
Non-mortgage debts being paid off within a short period: Some mortgage programs may allow borrowers to exclude certain non-mortgage debts from their DTI if they are scheduled to be paid off within a short period, typically within ten months or less. These debts may include personal loans, credit card balances, and other consumer debts. In cases where a non-occupying co-borrower is included on the mortgage application to help the primary borrower qualify, their debts may not be counted towards the DTI ratio of the primary borrower. However, the non-occupying co-borrower’s income is typically considered in the qualification process.
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Excluding Business Debts From Debt-to-Income Ratio Calculations
If a borrower has business debts for which they are not personally responsible, they may be excluded from the DTI calculation. However, the borrower may need documentation proving that the debts are associated with the business and not their obligations.
Excluding Debts From DTI Calculations on Co-Signed Debts
In certain situations, co-signed debts may be excluded from the primary borrower’s DTI if they can prove that someone else is making the payments on those debts and has been doing so consistently for an extended period. Some mortgage programs allow for the exclusion of deferred student loans from the DTI calculation, especially if the borrower can provide evidence that the student loans are in a deferral or forbearance period and won’t require immediate repayment. It’s essential to note that the specific guidelines and rules for excluding certain debts from DTI calculations can vary depending on the lender and the type of mortgage program. Mortgage guidelines are subject to change. New regulations or lender-specific policies may have been implemented since the last mortgage guidelines on exempt debts from DTI calculations.
Can a Co-Borrower on a Mortgage Be Excluded on The Existing Mortgage Debt When Buying a New Home
Let’s take a case scenario to explain how a co-borrower on a home loan can qualify for another mortgage loan and exclude the existing mortgage debt from DTI calculations. Let’s say a mother is the main borrower and the daughter is the co-borrower on a 2 unit owner occupant property. The daughter wants to move out and purchase her own home. The mother has been paying for the existing home mortgage. The mother can provide 12 months of canceled checks and/or bank statements to show proof that she has been making the mortgage payments. The co-borrower daughter will qualify for a new home loan and the existing mortgage debt is not included when qualifying for a mortgage
Exempt Debts on Tradeline Where Person Paying Is Not on The Note as a Co-Signer
Let’s take a second case scenario with the above mother and daughter. Let’s say the daughter has a car payment of $400 per month. The car is just under the daughter’s name and not the mother. However, the mother is helping the daughter out and is making the monthly car payments. The mother has been making the payments for the past 12 months. As long as the lender can get proof that the mother has been paying on the car payment in the past 12 months, the automobile monthly payment can be excluded from debt to income ratio calculations of the daughter. The person paying the debt does not have to be on the note as a co-signer. For more information on this topic or other mortgage topics, please contact us Gustan Cho Associates at 800-900-8569 or text us for faster response. Or email us at gcho@gustancho.com. We are available 7 days a week, evenings, weekends, and holidays.
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I need some clarification. If a person purchased a house and the mortgage statement and note shows that person as the primary borrower and his/her relative as the co-borrower can that person provide 12 months canceled checks to show the relative has been making the monthly mortgage payments, thus excluding the payments from the DTI?
Yes they can.