5401.1: Monthly housing expense-to-income ratio (03/22/17)

© Freddie Mac Single-Family Seller Servicer Guide

The monthly housing expense is the sum of the following monthly charges on the Borrower's Primary Residence:

Principal and interest payments on the Mortgage

Property hazard insurance premiums

Real estate taxes

When applicable:

Mortgage insurance premiums

Leasehold payments

Homeowners association dues (excluding unit utility charges)

Payments on secondary financing

Loan Product Advisor® calculates and assesses the Borrower's qualifying ratios based on input from the Seller. 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. As a guideline, the monthly housing expense-to-income ratio should not be greater than 25% to 28% of the Borrower's stable monthly income. The Borrower may exceed the monthly housing expense-to-income ratio and monthly debt payment-to-income ratio only on an exception basis with an offset documented in the Mortgage file.

Examples of conditions that might support the use of higher monthly payment ratios are found in Section 5401.2. Generally, however, more flexibility is appropriate for the monthly housing expense-to-income ratio than for the monthly debt payment-to-income ratio. Less flexibility is appropriate for situations involving additional layers of risk, such as ARMs, a marginal credit reputation, minimal reserves or maximum financing.

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.

If the property is energy-efficient or contains energy-efficient items (see Section 5601.12(o)), higher housing expense-to-income ratio and debt payment-to-income ratio may be appropriate. In its underwriting analysis, the Seller should consider the impact utility charges have on the Borrower's ability to meet the monthly housing expense and properly maintain the property. An energy-efficient property results in lower utility charges, allowing the owner to apply more income to housing expense. If higher ratios are used, the Seller must provide in the Mortgage file the calculation and source documentation used to derive the dollar offset allowed due to lower utility charges. Source documentation may be:

The appraisal report indicating the energy efficiency of the property, or

An established home energy rating system (HERS)

See Section 5103.1 for special requirements when a non-occupying Borrower is present.

See Section 4201.15(b) for special underwriting requirements for second home Mortgages.

See Section 4201.16(b) for special underwriting requirements for Investment Property Mortgages.

See Section 4204.4 for special requirements for Mortgages with temporary subsidy buydown plans.

See Section 4401.8 for special underwriting requirements for ARMs.