11.3 DEBT RATIO WAIVERS AND COMPENSATING FACTORS (10/05/16)

Owned by Marsha Freeman
Last updated: Nov 17, 2018 by Kacey Olson
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© RHS HB-1-3555 SFH Guaranteed Loan Program Technical Handbook


An applicant’s PITI ratio may exceed 29 percent and the total debt ratio may exceed 41 percent if the lender determines that strong meaningful compensating factors demonstrate that the household has higher repayment ability.

 A.  Debt ratio waivers

 Manually underwritten loans – purchase transactions . Agency concurrence with a lender request for debt ratio waiver may be granted if all of the following conditions are met:

 Either:

The PITI ratio is greater than 29 percent, but less than or equal to 32 percent, accompanied by a TD ratio not exceeding 44 percent; or

The TD ratio is greater than 41 percent, but less than or equal to 44 percent, accompanied by a PITI ratio not exceeding 32 percent;

 And:

 The credit score of all applicant(s) is 680 or greater; and

 At least one of the acceptable compensating factors listed below is identified and supporting documentation is provided to the Agency.

 Acceptable Compensating Factors and Supporting Documentation:

The proposed PITI is equal to or less than the applicant’s current verified housing expense for the 12 month period preceding loan application. Verification of housing expenses may be documented on a verification of rent (VOR) or credit report. The VOR or credit report must include the actual payment amount due and report no late payments or delinquency for the previous 12 months. Rent or mortgage payment histories from a family member 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.

Accumulated savings or cash reserves available post loan closing are equal to or greater than 3 months of PITI payments. A verification of deposit (VOD) or two most recent consecutive bank statements document the average balance held by the applicant are required. Cash on hand is not eligible for consideration as a compensating factor.

The applicant(s) (all employed applicants) has been continuously employed with their current primary employer for a minimum of 2 years. A “Request for Verification of Employment” (VOE) (Form RD 1910-5, comparable HUD/FHA/VA or Fannie Mae form, or other equivalent), or VOEs prepared by an employment verification service (e.g., The Work Number.) must be provided. This compensating factor is not applicable for self-employed applicants.

Debt Ratio Waiver Request and Agency Approval:

Debt ratio waivers must be requested and documented by the approved lender. The lender requests Agency concurrence with the debt ratio waiver by submitting a signed 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 review.

Manually underwritten loans –refinance transactions . The debt ratio waiver requirements in this Paragraph do not apply to refinance transactions. See Section B below on compensating factors to consider when requesting a debt ratio waiver for a refinance transaction.

GUS underwritten loans receiving an “Accept.” The debt ratio waiver requirements in this Paragraph do not apply to GUS files that receive an “Accept” underwriting recommendation or an “Accept” underwriting recommendation that requires a “Full Documentation” loan submission as part of a quality control message on the GUS Underwriting and Findings Report.

B. Compensating factors for refinance transactions

For manually underwritten refinance loans, the lender must thoroughly document the compensating factors that justify an exception. Higher repayment ratio exceptions are feasible when an applicant demonstrates compensating factors indicating the capacity, willingness and ability to pay mortgage payments in a timely manner. The presence of compensating factors does not strengthen a ratio exception when multiple layers of risk, such as marginal credit history, are present in an application. The following are examples of compensating factors:

Credit score of 680 or higher. Credit scores of 680 and higher can be documented as a standalone compensating factor for a debt ratio waiver request, if no additional risk layers are present (e.g., adverse credit, or payment shock, etc.).

The borrower(s) has successfully demonstrated the ability to pay housing expenses equal to or greater than the proposed monthly housing expense for the new mortgage over the past 12 months.

The borrower(s) has demonstrated a conservative attitude toward the use of credit.

The borrower(s) has demonstrated an ability to accumulate savings comparable to the difference between current housing costs and projected costs.

Cash reserves post closing. The use of retirement accounts as compensating factors and as cash reserves is limited to 60% of the vested amount of the retirement asset to offset potential withdrawals by the applicant(s). Retirement accounts that restrict withdrawals to circumstances involving the borrower’s employment separation, retirement or death should not be considered as a compensating factor or as cash reserves.

Continuous employment with the current primary employer.

The Agency will consider all requests for exception and weigh the proposal based on any additional layers of risk. Written approval by the Agency is represented if a Conditional Commitment for Loan Note Guarantee is issued by Rural Development in response to the lender’s request. Lenders who utilize the Agency’s automated underwriting system and receive an underwriting recommendation of “Accept” will not be required to document the need for a repayment ratio waiver.