USDA HB-1-3555, Chapter 11 (Ratio Analysis), § 11.2

USDA HB-1-3555, Chapter 11 (Ratio Analysis), § 11.2

Effective 2024-08-05 · USDA chapter revision · Procedure Notice 621

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 34 percent of their repayment income. Monthly housing expenses include: • First Mortgage (P&I); • Subordinate Lien(s); • Homeowner’s Insurance; • Supplemental Property Insurance; • Property Taxes; • Mortgage Insurance (First year annual fee monthly amount); • Association/Project Dues (Condo, Co-Op, PUD); and • 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. Paragraph 11.2 The Ratios 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 Agency. The following obligation expenses must be included in the monthly debts: 1. PITI • First Mortgage (P&I), property taxes, homeowner’s insurance, mortgage insurance (first year annual fee monthly amount), association/project dues, other. 2. Installment accounts • 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. • If ten or less months of repayment remains 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. • Installment debt may be paid down to ten months or less of remaining debt. 3. Revolving accounts • 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. • 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. Paragraph 11.2 The Ratios • 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. • Revolving accounts with no outstanding balance on the credit report do not require an estimated payment to be included in the debt ratio. • Revolving accounts with no outstanding balance are not required to be closed. 4. Open 30-Day Accounts • A 30-day account is a credit arrangement requiring the applicant to pay off the full outstanding balance on the account every month. • The lender may utilize the credit report to document the applicant has paid the outstanding balance for the previous 12 months. • If the credit report reflects late payments in the last 12 months, the lender must include five percent of the outstanding balance in the monthly debts. • 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. • 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. • Lenders will utilize select pages from the applicable agreement/court order to document the required monthly payment due and the duration of the debt. • 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. • 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 entry of this monthly obligation does not require an underwriting recommendation of “Accept” to be downgraded to a “Refer.” • Lenders must confirm repayment agreements are current. Refer to Chapter 10 for court ordered debt guidance and program eligibility. Paragraph 11.2 The Ratios 6. Child Care Expenses • Child care expenses are not required to be included in the monthly debt ratio. 7. Student loans • 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. • 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. • 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. • Co-signed obligations are addressed below in section 11. 8. Mortgages: Rental Property • A GUS Accept recommendation will not require a manual downgrade to a Refer when the net monthly rental income is negative. • 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. • If the credit report reflects late mortgage payments on the rental dwelling in the 12 months prior to loan application, the full mortgage liability and all associated costs must be included in the monthly debts. • Refer to Chapter 9 for rental income guidance. 9. Mortgages: No Release of Liability • 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 Paragraph 11.2 The Ratios included in the total debt ratio unless evidence can be obtained to confirm the remaining party/new owner has successfully made the payment for the previous 12 months prior to loan application. • Evidence may be reported through the credit report or verification from the creditor/servicer to document the payment history has been current for the 12 months prior to loan application. • If there are late payments in the previous 12 months prior to loan application, the full mortgage obligation must be included in the monthly debt. 10. Mortgages: Divorce • In the case of a divorce, the lender must obtain a copy of the legal separation agreement or divorce decree to document the remaining party/new owner is responsible to pay all mortgage debts from the effective date of the decree forward. • To exclude the mortgage debt, the lender must document the previous 12 months have been paid as agreed prior to loan application through the credit report or verification from the creditor/servicer. • If there are late payments in the previous 12 months prior to loan application, the full mortgage obligation must be included in the monthly debts. 11. Co-signed obligations • Co-signed debts refer to debts where the applicant may be a co-borrower, joint obligor, co-signer, guarantor, etc. • 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 previous 12 months prior to loan application. • 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 previous 12 months prior to application will require the monthly liability to be included in the monthly debts. • 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. Paragraph 11.2 The Ratios • 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). 12. Business debts • 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. • Acceptable evidence includes canceled checks or bank statements from a business account for the previous 12 months. • 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 • 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) • 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. • Approved lenders are responsible to confirm state laws are met. 15. Collection accounts • Refer to Chapter 10 for collection account guidance. 16. Judgment accounts • Refer to Chapter 10 for Federal and non-Federal judgment guidance. 17. Charge-off accounts • Refer to Chapter 10 for charge-off account guidance. Paragraph 11.2 The Ratios 18. Expense allowances (including Automobile Allowances) • An automobile or other expense allowance will not cancel out a monthly debt for an automobile or expense loan/debt. • 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. • For guidance on calculating income for expense allowances, refer to Chapter 9. 19. Balloon/deferred payments. • 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. • 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 • 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. • Refer to Chapter 10 for Federal Income Tax agreement eligibility. 21. Lease payments • Auto, solar, energy, and additional lease payments must have the payment included in the monthly debt regardless of months remaining to pay on the contract. 22. Debt management plans • Include the monthly payment amount due from the counseling plan. Paragraph 11.2 The Ratios • Refer to Chapter 10 for guidance on credit exception and documentation requirements.

Source: USDA HB-1-3555, Chapter 11 (Ratio Analysis), § 11.2 · source URL · snapshot 64c7bd1eb63a02a0