11.2 THE RATIOS (10/05/16)

© RHS HB-1-3555 SFH Guaranteed Loan Program Technical Handbook

The primary consideration when determining whether an applicant can afford to purchase a home is the applicant's repayment income. Repayment income, as described in Chapter 9 Section 2 of this Handbook, is the amount of dependable and stable income parties to the note will have available to repay the debt.

However, other household expenses and debts also greatly affect an applicant's repayment ability. 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 they do not have to pay more than 29 percent of repayment income for monthly housing expenses. Monthly housing expenses include the following:

Principal and interest payment on the mortgage;
Hazard insurance premiums, whether escrowed or not;
Real estate taxes, whether escrowed or not;
Monthly escrow required for annual fee;
Homeowners association dues;
Flood insurance premiums, whether escrowed or not; and
Special assessments.

B. The Total Debt Ratio

Applicants are considered to have repayment ability when they do not have to spend more than 41 percent of repayment income on total debt. Total debt includes monthly housing expense PITI plus any other monthly credit obligations incurred by the applicant. Obligations for child care, voluntary contributions to retirements such as a 401K, and open accounts with zero balance, are not considered a debt.

The lender must document an applicant’s debt through various records including a credit report, direct or third-party verifications, court documents, and verification of deposits for loans. All applicant open debts/accounts (including collection accounts, charge-offs and judgments) incurred through the note date must be included in the calculation of debt payment-to-income ratio and captured under liabilities on the application. Monthly obligation expenses include:

PITI.
Regular assessments, such as homeowner assessments.
Long-term obligations with more than ten months repayment remaining on the credit report presented at underwriting, including all installment loans, alimony, child support or separate maintenance payments, student loans and other continuing obligations.
Revolving accounts. The minimum monthly payment is required for all revolving credit card debts. Monthly payments on revolving or open-ended accounts are counted as a liability for qualifying purposes even if the account appears likely to be paid off within 10 months or less. If the credit report shows an outstanding balance, but no specific minimum monthly payment, the payment will be calculated as the greater of 5 percent of the balance as reported on the credit report, or $10. If the lender obtains a copy of the current statement reflecting the actual monthly payment, that amount can be used for qualifying purposes. The lender must retain documentation in their permanent loan file. Revolving accounts with no outstanding balance do not require an estimated payment to be included in the debt ratio or to be closed to exclude a payment from the long-term debt ratio.

30-Day Accounts. A 30-day account is a credit arrangement requiring the applicant to pay off the outstanding balance on the account every month. A lender must verify the outstanding balance is paid in full on every 30-day account each month for the past 12 months. 30-day accounts that are paid monthly in full are not included in the applicant’s long-term debt ratio. If the credit report reflects any late payments in the last 12 months, a long-term monthly payment will be included. The lender will utilize 5% of the outstanding balance as the applicant’s monthly debt. Lenders will utilize the credit report to document the applicant paid the balance on the account monthly for the previous 12 months.

Child support, alimony, garnishments. Applicants obligated to pay child support, alimony, garnishments, or other court ordered debts must have payment included in the total debt ratio. If the applicant has a release of liability from the court/creditor, and acceptable evidence is obtained, the debt can be excluded. Lenders will utilize select pages from the applicable agreement/court order to document the required monthly payment due and the duration of the debt. For GUS transactions, the lender will manually enter the obligations on the “Additional Expenses” on the “Assets and Liabilities” page. A manual entry of obligation does not require an underwriting recommendation of “Accept” to be downgraded to a “Refer.” Lenders will ensure repayment agreements are current.
Child care expenses. Child care expenses are not required to be considered as a recurring liability when calculating the total debt ratio.
Student loans. Lenders must include the greater of
One percent of the outstanding loan balance. OR
The fixed payment as reflected on the credit report. Income Based Repayment (IBR) plans; graduated plans, adjustable rates, interest only and deferred plans are examples of repayment plans that are subject to change and do not represent a fixed payment or repayment plan. These types of repayment plans are unacceptable to represent a long term fixed payment repayment plan.
It is the lender’s responsibility to ensure the correct fixed payment is utilized in the capacity analysis.
No additional documentation is required if a credit report is obtained.

Previous mortgage. Previous mortgage liabilities disposed of through a sale, trade or transfer without a release of liability will be included in the total debt ratio unless evidence can be obtained to confirm the remaining party (or new owner) has successfully made the payment in the previous 12 months prior to loan application. Documentation to be obtained by the lender includes:

In the case of a divorce, the lender will obtain a copy of the divorce decree ordering the spouse to make payments.
If the loan was assumed, sold or traded without a release of liability, a copy of the assumption agreement (as applicable) and deed showing transfer of title out of the applicant’s name will be obtained by the lender and retained in the lender’s permanent file.
Documented evidence the new owner has been making regular payments during the previous 12 months with no history of delinquent payment on the loan during that time. Evidence may be reported through the credit report or the lender may verify from the servicer of the assumed loan, a payment history showing that the mortgage has been current during the previous 12 months.
Loans that are transferred, sold or traded with a history of delinquent payments within the previous 12 months prior to application will be included in the applicant’s monthly obligations.
Co-signed obligations. Debts which have been co-signed (also known as coborrower, joint obligor or guarantor) are considered a contingent liability. A contingent liability exists when an individual is held responsible for payment of a debt if another party, jointly, or severally obligated, defaults on the payment. A contingent liability applies and the debt will be considered in the total debt ratio unless the applicant provides evidence another obligor has made the payment in the previous 12 months prior to loan application. If the applicant can provide conclusive evidence from the debt holder that there is no possibility that the debt holder will pursue debt collection against the applicant should the other party default, the 12 month history is not required. Acceptable evidence that demonstrates the remaining co-obligor’s history of making regular payments during the previous 12 months include 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 long-term repayment ratio of the applicant. Debts identified as “individual” on a credit report will always be considered in the debt ratio regardless of what party is making the monthly payment (as an example, parents making car payments on behalf of applicant and the loan is in the applicant’s name). The legal obligation resides with the applicant when identified as “individual.”
Business debts. Business debts (for example – car loan) reported on the applicant’s personal credit report may be excluded from the debt ratio if the debt is paid through a business account. An example of acceptable evidence the debt is paid through a business account includes canceled business checks or bank statements for the previous 12 months.
401(k) loans/personal asset loans. Loans pledging personal assets, such as a 401(k) account, retirement funds, savings account or other liquid assets are not considered in the total debt ratio.
Debts of a non-purchasing spouse (NPS). For applicants who reside or are purchasing in a community property state, the debts of the NPS must be included in the applicant’s total debt ratio unless specifically excluded by state law.
Collection accounts. Collection accounts, as outlined in Paragraph 10.9 of Chapter 10 of this Handbook will be included in the total debt ratio.
Judgment accounts. Judgments accounts with a repayment plan already established and a history of consistent repayment underway will be included as a long-term obligation, unless less than 10 months of the repayment plan remains and the lender determines the debt does not have a significant impact on the repayment of the applicant as later explained in this section under short-term liabilities. A letter from the creditor or evidence on the credit report is required to validate the payment arrangements and payment history. Refer to Chapter 10, Section 10.10 for additional guidance on judgments.
Charge-off accounts. Charge-off accounts are debts written off and are not required to be included in the applicant’s liabilities or debt.
Self-employed. Negative income (loss) for a business will be deducted from repayment income prior to calculating the total debt ratio. It is not counted as recurring debt.
Automobile Allowances and Expense Account Payments. The amount of actual expenditures exceeding the amount of automobile allowance or expense account payments will be treated as recurring debt. Lenders will utilize IRS Form 2106, Employee Business Expenses, for the previous two years and employer verification that the payments will continue as documentation to support the calculation. The applicant’s monthly car payment will be treated as recurring debt and will not be offset by any car allowance. If an applicant utilizes the standard per-mile rate as opposed to the actual cost method on IRS Form 2106, the portion that the IRS considers depreciation may be added back to income for repayment purposes.
Rental loss. Negative net rental income will be treated as a recurring liability and included in the total debt ratio.
Short-term obligations that are considered to have a significant impact on repayment ability, such as large medical bills and car or other credit payments. A significant impact on repayment is defined as 5% or greater of the gross monthly income of the applicant(s). Installment debt can be paid down prior to underwriting to a repayment balance less than 10 months; however underwriters can include any debt that in their underwriting analysis is considered a significant impact to the applicant’s ability to repay the debt.

Balloon/deferred payments and payments that will come due in the next 24 months, including personal loans with deferred installments and balloon payments. Additional guidance surrounding student loan repayment is provided earlier in this section and not applicable under this subject. If the actual payment on a deferred loan is unknown, the lender should estimate the monthly payments using 5% of the outstanding balance.