Refer to Bulletin 2017-23, which announced revisions to our requirements for calculating the monthly debt payment-to-income ratio, which can be implemented prior to the 01/18/18 version of this section.
(a) Liabilities included in the monthly debt payment-to-income ratio The monthly debt payment is the sum of the monthly charges for the following liabilities:
1. Monthly housing expense (see Section 5401.1)
2. Payments on all installment debts with more than 10 months of payments remaining, including debts that are in a period of either deferment or forbearance.
- The monthly payment amount reported on the credit report, or
- 0.5 % of the original loan balance or the outstanding loan balance, as reported on the credit report, whichever is greater
- The monthly payment amount reported on the credit report, or
- 1% of the original loan balance or the outstanding balance, as reported on the credit report, whichever is greater
- The student loan has 10 or less monthly payments remaining until the full balance of the student loan is forgiven, canceled, discharged or in the case of an employment-contingent repayment program, paid, or
- The monthly payment on a student loan is deferred or is in forbearance and the full balance of the student loan will be forgiven, canceled, discharged or in the case of an employment-contingent repayment program, paid, at the end of the deferment or forbearance period
AND
- The Borrower currently meets the requirements for the student loan forgiveness, cancellation, discharge or employment-contingent repayment program, as applicable, and the Seller is not aware of any circumstances that will make the Borrower ineligible in the future
3. Alimony, child support or maintenance payments with more than 10 months of payments remaining
4. Monthly payments on revolving or open-end accounts, regardless of the balance. In the absence of a monthly payment on the credit report, and if there is no documentation in the Mortgage file indicating the monthly payment amount, 5% of the outstanding balance will be considered to be the required monthly payment amount. Monthly payments on open-end accounts (accounts which require the balance to be paid in full monthly) are not required to be included in the monthly debt payment if the Borrower has sufficient verified funds to pay off the outstanding account balance. The funds must be in addition to any funds used to qualify the Borrower for the Mortgage transaction.
5. Monthly lease payments, regardless of the number of payments remaining, with the exception of payments for solar panels subject to a lease agreement, power purchase agreement (PPA) or similar type of agreement that meets the requirements of Section 5401.2(b)(iii)
6. Monthly payment amounts for properties for which rental income is being considered for qualification purposes: Refer to Chapter 5306 for requirements with respect to treatment of debt when using rental income. Refer to Chapter 5304 for requirements with respect to treatment of debt when all rental income and expenses are reported on IRS Form 8825, Rental Real Estate Income and Expenses of a Partnership or an S Corporation. (Future effective date 02/09/18)
7. Monthly payment amounts for other properties, including principal and interest on the First Lien and any secondary financing, taxes and insurance and, when applicable, mortgage insurance premiums, leasehold payments, homeowners association dues (excluding unit utility charges)If the Borrower's current Primary Residence is pending sale and the sale will not close before the Note Date of the Mortgage, or for Construction Conversion and Renovation Mortgages, the Effective Date of Permanent Financing, the monthly payment amount for the property pending sale may be excluded from the monthly debt payment-to-income ratio if the Mortgage file contains:
- An executed sales contract for the property pending sale. If the executed sales contract includes a financing contingency, the Mortgage file must also contain evidence that the financing contingency has been cleared or a lender's commitment to the buyer of the property pending sale;
OR
- An executed buyout agreement that is part of an employer relocation plan where the employer/relocation company takes responsibility for the outstanding Mortgage(s)
The Borrower's liabilities must be reflected on the Mortgage application (Form 65, Uniform Residential Loan Application) and considered when qualifying the Borrower. Sellers must review the Mortgage application, credit report, Borrower's paystubs (if provided) and other file documentation for Borrower liabilities. All of the Borrower's debts incurred through the Note Date must be considered when qualifying the Borrower.
When the Borrower pays off or pays down an existing debt (including paying down the principal balance on the Mortgage being refinanced) in order to qualify for the Mortgage, the Seller must document the source of funds used to pay off or pay down the debt. The source of funds must be an eligible source as described in Section 5501.3.
(b) Liabilities that may be excluded from the monthly debt payment-to-income ratio
| Debt type | Eligibility and documentation requirements |
| Documentation in the Mortgage file must indicate the following:
|
| Mortgage | Documentation in the Mortgage file must indicate the following:
|
The Seller must evaluate the validity of circumstances under which the payments are being made by another party. For example, payments on multiple student loans made by the Borrower's parent represent a common situation. However, additional investigation and documentation might be necessary when a Borrower's multiple installment and revolving debts are being paid by the Borrower's spouse who is not on the subject Mortgage.
- Has been assigned to another by court order, such as a divorce decree, and
- The Seller documents the order (e.g., provides appropriate pages from the separation agreement or divorce decree) and documents the transfer of title
- The Mortgage file contains evidence that the debt has been paid timely by the Borrower's business for no less than the most recent 12 months, and
- The tax returns evidence that business expenses associated with the debt (e.g., interest, lease payments, taxes, insurance) have been reported and support that the debt has been paid by the business
- Provides for delivery of a specific amount of energy for an agreed upon payment during a given period; and
- Includes a production guarantee under which the Borrower is compensated on a prorated basis when the energy produced by the solar panels is less than the level required in the lease agreement
Payments for solar panels subject to a PPA or similar type of agreement may be excluded from the monthly debt payment-to-income ratio if the payment is calculated based only on the generated energy.
The Mortgage file must contain a copy of the lease agreement, PPA or similar type of agreement, as applicable.
(c) Evaluating debt ratios Loan Product Advisor calculates and evaluates the Borrower's qualifying ratios. For Accept Mortgages and A-minus Mortgages, Loan Product Advisor has determined that the Borrower's qualifying ratios are acceptable.For Manually Underwritten Mortgages, the Seller must evaluate the Borrower's ability to pay the monthly housing expense and other obligations. When the Borrower's monthly debt payment to income ratio exceeds 45%, the loan is ineligible for sale to Freddie Mac. As a guideline, the monthly debt payment-to-income ratio should not be greater than 33% to 36% of the Borrower's stable monthly income.When the Borrower's monthly debt payment-to-income ratio exceeds 36%, the Seller must document in the file the justification for the higher qualifying ratio.Except in rare circumstances, the Borrower's debt-to-income ratio should not exceed 36% for the following Mortgages:
- Cash-out refinance Mortgages
- Investment Property Mortgages
- Mortgages secured by second homes
- Mortgages secured by 2- to 4-unit properties
- Mortgages where there is evidence that the Borrower increases debt and then periodically uses refinance or debt consolidation loans to reduce payments to a manageable level
The following factors may be considered in justifying a debt payment-to-income ratio that exceeds 36% but is not greater than 45%:
- The Mortgage is secured by an energy efficient property, as described in Section 5401.1
- The Borrower's probability for increased earnings based on education, job training or time employed or practiced in a profession
- Documented rent paid by Related Persons living in the house
- The Borrower demonstrated ability to carry a higher housing expense or higher debt level while maintaining a good credit history for at least 12 months
- The existence of verified income that is not included within the definition of "stable monthly income" in Section 5301.1 when there is an expectation that future expenses will be lower (such as child-support income that is scheduled to cease in one year when a child becomes an adult. In this case, the expectation would be that either future household expenses will be lower or that additional income will be provided by the new adult.)
In addition, the examples listed below may be used to justify higher qualifying ratios for Non-Loan Product Advisor Mortgages. These examples may not be used to justify higher qualifying ratios for Caution Mortgages because they have already been considered by Loan Product Advisor.
1. The Borrower's verified liquid assets are substantial enough to evidence an ability to repay the Mortgage regardless of income
2. A down payment on the purchase of the property of at least 25%
3. The Borrower's strong Credit Score (for example, a 740 or higher Fair Isaac Corporation (FICO®) score) and the Seller's confirmation that the Borrower's credit reputation is excellent
For any Manually Underwritten Mortgage for which either of the ratio guidelines is exceeded, the Seller must prepare and retain in the Mortgage file a written explanation justifying its underwriting decision.
See Section 5103.1 for special requirements when a non-occupying Borrower is present.
| Related Guide Bulletins | Issue Date |
|---|---|
| Bulletin 2017-23 | October 18, 2017 |
| Bulletin 2016-23 | December 15, 2016 |
| Bulletin 2016-20 | November 9, 2016 |
| Bulletin 2016-12 | June 29, 2016 |
Additional Resource: https://www.allregs.com/tpl/Viewform.aspx?formid=00051759&formtype=agency#page=469