SUPERSEDED — prior version (Revised (05-05-25) PN 640) — USDA SFH Guaranteed Loan Program Technical Handbook HB-1-3555 ¶11.3 — Debt Ratio Waivers and Compensating Factors

[SUPERSEDED] USDA HB-1-3555, Chapter 11 (Ratio Analysis), § 11.3 — Debt Ratio Waivers and Compensating Factors

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

11.3 DEBT RATIO WAIVERS AND COMPENSATING FACTORS [7 CFR 3555.151(H)(3)] The applicants’ PITI ratio may exceed 29 percent, and the Total Debt ratio may exceed 41 percent if the lender determines that strong compensating factors demonstrate that the household has higher repayment ability. A. Purchase Transactions: Debt ratio waivers 1. GUS Accept loans: GUS files that receive an Accept or Accept Full Documentation underwriting recommendation do not require a debt ratio waiver. 2. GUS Refer, Refer with Caution, and manually underwritten loans without GUS assistance: The lender must document eligible compensating factors to support a debt ratio waiver. Agency approval of a lender’s request may be granted if all of the following conditions are met: x Acceptable ratio thresholds are met: o The maximum PITI ratio cannot exceed 32 percent, and o The maximum TD ratio cannot exceed 44 percent; x The validated credit score of all applicants is 680 or greater; HB-1-3555 (03-09-16) SPECIAL PN 11-9 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 At least one of the acceptable compensating factors listed below is identified. Supporting documentation is provided to the Agency and maintained in the lender’s permanent file. Acceptable Compensating Factors and Supporting Documentation: o Accumulated savings or cash reserves available post loan closing are equal to or greater than three months of PITI payments. Documentation may include a verification of deposit (VOD) or bank statements that meet the requirements of Chapter 9. Cash on hand is not eligible for consideration as a compensating factor. o The applicant(s) (all employed applicants) has been continuously employed with their current primary employer for a minimum of two years. A Request for Verification of Employment (VOE) (Form RD 1910-5, comparable HUD, FHA, VA, or Fannie Mae form, or equivalent), or a VOE prepared by an employment verification service (e.g. The Work Number) must be provided. Applicants that have received Social Security benefits or retirement income for two years may utilize this compensating factor with documentation to support the history of receipt of benefits. This compensating factor is not applicable for self-employed applicants. o The proposed PITI does not exceed the applicant’s current verified housing expense by more than $100 or 5 percent, whichever is less, for the 12-month period preceding loan application. Verification of housing expenses may be documented on a Verification of Rent (VOR), Verification of Mortgage (VOM), or credit report, as noted in Chapter 10. The VOR, VOM, or credit report must include the actual payment due and report no more than one 30 day late payment for the previous 12 months. Rent or mortgage payment histories from a family member or interested party will not be considered unless 12 months of canceled checks, money order receipts, or electronic payment confirmations are provided. A history of less than 12 months will not be considered an acceptable compensating factor. o The subject property is an energy efficient home based on the International Energy Conservation Code (IECC) standards, defined as: x For new construction, the dwelling meets or exceeds the IECC in effect at the time of construction. The lender is responsible for verifying the home meets the IECC standards, with evidence maintained in the lender’s permanent loan file. Refer to Chapter HB-1-3555 (03-09-16) SPECIAL PN 11-10 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. 12 for guidance in documenting thermal standards for new construction dwellings. x For existing dwellings, the dwelling meets or exceeds the current IECC. Existing dwellings that have been retrofitted to meet the current IECC standards are eligible. The lender is responsible for verifying the home meets the current IECC standards, with evidence maintained in the lender’s permanent loan file. x Debt Ratio Waiver Request and Agency Approval: o Debt ratio waivers must be requested and documented by the approved lender. The lender requests Agency concurrence with the debt ratio waiver by submitting an underwriting analysis that cites one or more of the above acceptable compensating factors. Lenders may utilize Fannie Mae 1008 / Freddie Mac 1077, Uniform Underwriting and Transmittal Summary, or similar form. Evidence of the compensating factor, such as a VOR, VOD, and/or VOE, must be submitted to the Agency for approval. o The issuance of the Conditional Commitment for a Loan Note Guarantee represents Agency approval of the ratio waiver. B. Refinance Transactions: Debt ratio waivers 1. GUS Accept loans: x GUS files that receive an Accept or Accept Full Documentation underwriting recommendation do not require debt ratio waivers. 2. GUS Refer, Refer with Caution, and manually underwritten loans without GUS assistance: x GUS files that receive a GUS recommendation of Refer, Refer with Caution, or are not supported by GUS require debt ratio waivers, and supporting documentation must be submitted to the Agency. x Streamlined-assist refinance loans do not require debt ratio calculations; therefore, debt ratio waivers are not required. x Debt ratios for refinance loans are not limited to the maximum purchase debt ratio thresholds. HB-1-3555 (03-09-16) SPECIAL PN 11-11 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 The following are examples of acceptable compensating factors for debt ratio waiver requests: o Validated credit score of 680 or higher for all applicants. o The proposed PITI does not exceed the borrower’s current verified mortgage payment by more than $100 or 5 percent, whichever is less, for the 12-month period preceding loan application. o Accumulated savings or cash reserves available post-closing are equal to or greater than three months of the proposed PITI payment. Cash on hand is not eligible for consideration as a compensating factor. o Continuous employment with the current primary employer. o The subject property is an energy efficient home, defined as a dwelling which meets or exceeds the current International Energy Conservation Code (IECC). Existing dwellings that have been retrofitted to meet the current IECC standards are eligible. The lender is responsible for verifying the home meets the current IECC standards, with evidence maintained in the lender’s permanent loan file. x The issuance of the Conditional Commitment for a Loan Note Guarantee represents Agency approval of the ratio waiver.

Source: USDA HB-1-3555, Chapter 11 (Ratio Analysis), § 11.3 — Debt Ratio Waivers and Compensating Factors · source URL · snapshot 0466acd1ea2d17a4