SUPERSEDED — prior version (Revised (05-05-25) PN 640) — USDA SFH Guaranteed Loan Program Technical Handbook HB-1-3555 ¶11.2 — The Ratios

[SUPERSEDED] USDA HB-1-3555, Chapter 11 (Ratio Analysis), § 11.2 — The Ratios

Effective 2025-05-05 · USDA chapter revision · Procedure Notice 640

11.2 THE RATIOS [7 CFR 3555.151(H)(1)(I)] Ratios are calculated by utilizing the repayment income, as determined by the lender in Chapter 9, Section 2 of this Handbook. To qualify for a guarantee, borrowers must meet the Agency’s standards For both the PITI and TD ratios. A. The PITI Ratio Applicants are considered to have repayment ability if their proposed monthly housing expense does not exceed 29 percent of their repayment income. Monthly housing expenses include: x First Mortgage (P&I); x Subordinate Lien(s); x Homeowner’s Insurance; x Supplemental Property Insurance; x Property Taxes; x Mortgage Insurance (First year annual fee monthly amount); x Association/Project Dues (Condo, Co-Op, PUD); and x Other. B. The Total Debt Ratio Applicants are considered to have repayment ability when their total debts do not exceed 41 percent of their repayment income. HB-1-3555 (03-09-16) SPECIAL PN 11-2 Revised (05-05-25) PN 640 Guidance documents lack the force and effect of law, unless expressly authorized by statute or incorporated into a contract. USDA may not cite, use, or rely on any guidance that is not available through their guidance portal, except to establish historical facts. The total debt ratio includes monthly housing expense (PITI) plus other monthly credit or debt obligations incurred by the applicants. The lender must document the applicants’ debts through various records including, but not limited to, credit reports, direct or third-party verifications, court documents, and verification of deposits. All open debts/accounts (including non-medical collection accounts and judgments) incurred through the closing date must be considered in the total debt calculation and documented in GUS and the loan application, as applicable. Amounts listed on the credit report will be used unless verification supports an alternate payment amount. If an amount other than that shown on the credit report is used, the lender will provide documentation of the amount utilized. This documentation will be uploaded with the final submission to the Agency. If an applicant pays off a debt in order to qualify, the lender must document the source of funds used to pay off the obligation in their permanent loan file. The following obligation expenses must be included in the monthly debts: 1. PITI x First Mortgage (P&I), property taxes, homeowner’s insurance, mortgage insurance (first year annual fee monthly amount), association/project dues, other. 2. Installment Accounts x Accounts that will be paid in full through a specified number of fixed payments such as auto, personal, secured/unsecured, etc. must have the monthly payment included. x If ten or less months of repayment remains on any individual account per the credit report, creditor verification, etc., the monthly debt may be omitted if the payment does not exceed five percent of the monthly repayment income. x Installment debt may be paid down to ten months or less of remaining debt. 3. Revolving Accounts x Credit cards, lines of credit, secured/unsecured loans, etc. must include the minimum monthly payment documented on the credit report or other creditor verification in the total debts. HB-1-3555 (03-09-16) SPECIAL PN 11-3 Revised (05-05-25) PN 640 Guidance documents lack the force and effect of law, unless expressly authorized by statute or incorporated into a contract. USDA may not cite, use, or rely on any guidance that is not available through their guidance portal, except to establish historical facts. x If the credit report shows an outstanding balance, but no minimum monthly payment, the payment must be calculated as five percent of the balance reported on the credit report. x The lender may obtain a current account statement or creditor verification to document the actual monthly payment and include that amount in the monthly debts. x Revolving accounts with no outstanding balance on the credit report do not require an estimated payment to be included in the debt ratio. x Revolving accounts with no outstanding balance are not required to be closed. 4. Open 30-Day Accounts x A 30-day account is a credit arrangement requiring the applicant to pay off the full outstanding balance on the account every month. x The lender may utilize the credit report to document the applicant has paid the outstanding balance for the most recent 12 months. x If the credit report reflects late payments in the most recent 12 months, the lender must include five percent of the outstanding balance in the monthly debts. x 30-day accounts that are paid monthly in full are not included in the total debt ratio. 5. Court Ordered Debts: Child Support, Alimony, Garnishments, etc. x Court ordered debts must have the payment included in the total debt ratio unless the applicant has a release of liability from the court/creditor and acceptable evidence is documented. x Lenders will utilize select pages from the applicable agreement/court order to document the required monthly payment due and the duration of the debt. x Court ordered debts with ten or less payments remaining may be excluded if the payment does not exceed five percent of the monthly repayment income. x For GUS transactions, the lender will manually enter the obligation(s) as a monthly liability. When the obligation account is entered as other, the lender will specify what the obligation is (i.e. court ordered child support). A manual HB-1-3555 (03-09-16) SPECIAL PN 11-4 Revised (05-05-25) PN 640 Guidance documents lack the force and effect of law, unless expressly authorized by statute or incorporated into a contract. USDA may not cite, use, or rely on any guidance that is not available through their guidance portal, except to establish historical facts. entry of this monthly obligation does not require an underwriting recommendation of Accept to be downgraded to a Refer x Lenders must confirm repayment agreements are current. Refer to Chapter 10 for court ordered debt guidance and program eligibility. 6. Child Care Expenses x Child care expenses are not required to be included in the monthly debt ratio. 7. Student Loans x For outstanding student loans, regardless of the payment status, lenders must use: o The payment amount reported on the credit report or the actual documented payment, when the payment amount is above zero; or o One half (.50) percent of the outstanding loan balance documented on the credit report or creditor verification, when the payment amount is zero. x Student loans in the applicant’s name alone but paid by another party remain the legal responsibility of the applicant. The applicable payment must be included in the monthly debts. x Student loans in a “forgiveness” plan/program remain the legal responsibility of the applicant until they are released of liability from the creditor. The applicable payment must be included in the monthly debts. x Co-signed obligations are addressed below in section 11. 8. Mortgages: Rental Property x A GUS Accept recommendation will not require a manual downgrade to a Refer when the net monthly rental income is negative. x Income received from rents may only be counted for repayment if received for 24 months or more. Rental income received for less than 24 months should not be entered into GUS as rental income. x If the credit report reflects late mortgage payments on the rental dwelling in the most recent 12 months, the full mortgage liability and all associated costs must be included in the monthly debts. HB-1-3555 (03-09-16) SPECIAL PN 11-5 Revised (05-05-25) PN 640 Guidance documents lack the force and effect of law, unless expressly authorized by statute or incorporated into a contract. USDA may not cite, use, or rely on any guidance that is not available through their guidance portal, except to establish historical facts. x Refer to Chapter 9 for rental income guidance. 9. Mortgages: No Release of Liability x Mortgage liabilities disposed of through a sale, trade, or transfer without a release of liability (i.e. the borrower remains on the promissory note) must be included in the total debt ratio unless evidence can be obtained to confirm the remaining legally obligated party has successfully made the payment for the most recent 12 months. x Evidence may be reported through the credit report or verification from the creditor/servicer to document the payment history has been current for the most recent 12 months. x If there are late payments in the most recent 12 months, the full mortgage obligation must be included in the monthly debt. 10. Mortgages: Divorce x In the case of a divorce, the lender must obtain a copy of the legal separation agreement or divorce decree to document the remaining legally obligated party is responsible to pay all mortgage debts from the effective date of the decree forward. x Mortgage debts assigned to another party by court order (such as through a divorce decree) can be excluded from consideration when there is evidence the other party is legally obligated to pay the debt. A copy of the court order which requires the other party to make the payments must be retained in the lender’s permanent loan file. x The applicant is limited to being party to one USDA funded or guaranteed loan. 11. Co-signed obligations x Co-signed debts refer to debts where the applicant may be a co-borrower, joint obligor, co-signer, guarantor, etc. x Co-signed debts must be included in the monthly debts unless the applicants provide evidence another obligor (party to the debt) has successfully made the payment for the most recent 12 months. HB-1-3555 (03-09-16) SPECIAL PN 11-6 Revised (05-05-25) PN 640 Guidance documents lack the force and effect of law, unless expressly authorized by statute or incorporated into a contract. USDA may not cite, use, or rely on any guidance that is not available through their guidance portal, except to establish historical facts. x Acceptable evidence includes, but is not limited to, canceled checks, money order receipts, and/or bank statements of the co-obligor. Late payments reported in the most recent 12 months will require the monthly liability to be included in the monthly debts. x If the applicant can provide conclusive evidence from the creditor that they will not pursue debt collection against the applicant should the other party default, the 12-month payment history of the additional party is not required. x Debts identified as “individual” on a credit report must be included in the debt ratio regardless of who is making the monthly payment (e.g. parents paying car payments on behalf of applicant and the loan is solely in the applicant’s name). x Debts assigned to another party by court order (such as through a divorce decree) can be excluded from consideration when there is evidence the other party is legally obligated to pay the debt. A copy of the court order which requires the other party to make the payments must be retained in the lender’s permanent loan file. 12. Business Debts x Business debts (e.g. car loan) reported on the applicants’ personal credit report may be omitted from the monthly debt if there is evidence the debt is paid through a business account. x Acceptable evidence includes canceled checks or bank statements from a business account for the most recent 12 months. x Payments paid by the business must be included on the cash flow analysis and/or profit and loss statement, when applicable. 13. 401(k) Loans/Personal Asset Loans x Loans pledging personal assets, such as a 401(k) account, retirement funds, savings account, or other liquid assets do not require a payment to be included in the monthly debts. 14. Debts of a Non-Purchasing Spouse (NPS) x Applicants who currently reside or are purchasing in a community property state must include the debts of the NPS unless specifically excluded by state law. HB-1-3555 (03-09-16) SPECIAL PN 11-7 Revised (05-05-25) PN 640 Guidance documents lack the force and effect of law, unless expressly authorized by statute or incorporated into a contract. USDA may not cite, use, or rely on any guidance that is not available through their guidance portal, except to establish historical facts. x Approved lenders are responsible to confirm state laws are met. 15. Collection Accounts x Refer to Chapter 10 for collection account guidance. 16. Judgment Accounts x Refer to Chapter 10 for Federal and non-Federal judgment guidance. 17. Charge-off Accounts x Refer to Chapter 10 for charge-off account guidance. 18. Expense allowances (including automobile allowances) x An automobile or other expense allowance will not cancel out a monthly debt for an automobile or expense loan/debt. x The full amount of the monthly debt associated with the expense (such as a car or equipment payment) must be included in the total debt ratio calculation. x For guidance on calculating income for expense allowances, refer to Chapter 9. 19. Balloon/Deferred Payments x Deferred debts and balloon debts that will require payment in full upon their due date must have a payment included in the monthly debts. When the balloon/deferred payment loan is due within 12 months, the lender must evaluate the complete loan application to make a determination regarding the applicants’ repayment ability. x If the actual payment on a deferred/balloon loan is unknown, the lender may obtain documentation from the creditor to establish a monthly payment that will be due on a documented payment date, or they must use five percent of the outstanding balance on the credit report or creditor verification. 20. Tax Repayment Agreements x Include Federal or State income tax repayment plan payments in the monthly debt. If ten or less months of repayment remains per the plan, the monthly debt may be excluded if the payment does not exceed five percent of the monthly repayment income. HB-1-3555 (03-09-16) SPECIAL PN 11-8 Revised (05-05-25) PN 640 Guidance documents lack the force and effect of law, unless expressly authorized by statute or incorporated into a contract. USDA may not cite, use, or rely on any guidance that is not available through their guidance portal, except to establish historical facts. x Refer to Chapter 10 for Federal Income Tax agreement eligibility. 21. Lease Payments x Auto, solar, energy, and additional lease payments must have the payment included in the monthly debt regardless of the number of months remaining to pay on the contract. 22. Debt Management Plans x Include the monthly payment amount due from the counseling plan. x Refer to Chapter 10 for guidance on credit exception and documentation requirements.

Source: USDA HB-1-3555, Chapter 11 (Ratio Analysis), § 11.2 — The Ratios · source URL · snapshot 0466acd1ea2d17a4