Fannie Mae has increased the maximum allowable debt-to-income ratio on loans eligible for its purchase to 50%. Interestingly, the higher threshold for DTI ratios is accompanied by other guidelines that can lower them.
In this regard, Fannie Mae has recently issued a clarification regarding mortgages paid by others in calculating a borrower’s DTI ratio. The update clarifies how mortgage debts that one is obligated to pay, but are being paid by others, can get excluded from the DTI calculation.
Sounds confusing yet promising, right?
Mortgage Debts Paid by Others Excluded From DTI
Last October 31, Fannie Mae announced updates to its Selling Guide for lenders making mortgages that conform to its standards.
One update makes changes to its earlier guidance on excluding mortgage debts that a borrower is obligated but another party is making the payments from the borrower’s DTI ratio calculation.
Under this rule, as updated, the exclusion of the borrower’s full monthly housing expense signified by his/her PITIA (principal, interest, taxes, insurance and other assessments) from his/her recurring debt obligations used to calculate DTI ratio will occur when:
- The party making the mortgage payments is obligated on the mortgage loan. This party should not be delinquent in paying the mortgage for the last 12 months. The lender is tasked to obtain proof that (i) these payments were made during the last 12 months and (ii) there is no history of delinquency during the relevant period.
- The borrower is not using rental income from the property securing the subject mortgage to as qualifying income for a mortgage. The subject mortgage will be included in the count of multiple financed properties and its unpaid principal balance used to calculate reserves for multiple financed properties.
The clarifications are effective immediately.
Monthly Debt Obligations and Debt to Income Ratios
The DTI ratio shows your monthly housing expense and other recurring obligations vis-a-vis your gross monthly income.
With mortgage debts paid by others removable from the debt-to-income ratio per the above conditions, what are other expenses that can be possibly excluded from its calculation per Fannie Mae’s guidelines?
- Alimony. The lender may reduce a borrower’s qualifying income instead of including alimony payments in the DTI ratio.
- A business debt in a borrower’s name. The lender will not include it in the DTI ratio if there’s proof that the debt is being paid out of the company’s funds and other conditions.
- A court-ordered assignment of debt. It will not be considered as a recurring obligation if the debt is a contingent liability, e.g. the creditor has not released the borrower from liability.
- Non-mortgage debt paid by others. Student loans, for example, can be excluded from debt-to-income calculation if they are paid by others, regardless of whether the party paying is obligated to the loan or not.
- Home equity lines of credit. If a HELOC does not require a monthly payment, the lender may exclude it from the DTI calculation.
- Installment debts. An installment debt with fewer than 10 payments on it and does not significantly affect the borrower’s ability to repay his/her existing obligations may be excluded.
- Loans secured by financial assets. Loans secured by life insurance policies, for instance, may be considered contingent liability and not a monthly debt obligation.
- Open 30-day charge accounts. They are not required to be included in the DTI ratio.
For more information about how DTI ratios are calculated, speak with a lender today.
Justin McHood is a managing partner at Suited Connector and has been recognized by national media outlets as a financial expert for more than a decade.