When can you exclude a loan payment from the debt-to-income ratio for a mortgage?
Your debt-to-income ratio is the ratio of your monthly debt expense -- including payments for personal debts plus your mortgage, property tax and homeowners insurance -- to your monthly gross income. Lenders use your debt-to-income ratio to determine what size mortgage you can afford.
In short, you are permitted to spend a certain amount of your monthly income on debt expenses. The debt-to-income ratio for a mortgage varies by lender, loan program and other factors but usually ranges from 40% to 50%.
This means you can spend 40% to 50% of your monthly gross income on your mortgage and other debt payments. The higher the debt-to-income ratio applied by the lender, the higher the mortgage amount you qualify for.
Use ourDEBT-TO-INCOME RATIO CALCULATORto determine the mortgage you can afford
Your debt-to-income ratio basically includes every type of monthly debt payment or obligation you can think of. This includes revolving debt with varying payments based on your loan balance, such as:
credit cards
line of credit
As well as installment loans with a fixed payment and term, such as:
car loans and leases
personal loans
student loans
mortgage / rent
home equity loans
timeshare payments
If you pay alimony or child support, these expenses are also considered debt.
In almost all cases, all of the items listed above are included in your debt-to-income ratio when you apply for a mortgage but there are two scenarios when debt payments can be excluded. We review both of these scenarios in detail below.
Installment debt if you have ten payments or less remaining.
If you have fewer than eleven payments left on an installment loan, the lender is permitted to exclude those payments from your debt-to-income ratio. For example, if you have five monthly payments remaining on a car loan, the lender can omit that monthly payment from your application.
Please note that the lender may include an installment loan in your debt-to-income ratio even if you have ten or less payments remaining. Lenders can do this if they determine the payments impact your ability to afford your mortgage for the duration of the loan.
For an FHA mortgage, the payments can only be excluded if the total amount of the remaining payments does not exceed 5% of your monthly gross income. This means most loan payments are included in your debt-to-income ratio for an FHA loan, regardless of how many payments you have left.
Additionally, lease payments for a car are always included in your debt-to-income ratio no matter how many payments are remaining because you usually renew or take out a new lease or buy a new car.
If someone else has paid the debt payments for at least twelve months.
If you can document that another person has made the monthly payments on a loan for at least a year, you can exclude that payment from your debt-to-income ratio. For example, if your parents have paid your students loans for the past twelve months, those payments are not included when you apply.
For conventional mortgages, this guideline applies to all of the installment and revolving loan examples listed above, except mortgages, regardless of if the individual who has made the payments is listed as a borrower. The individual, however, cannot be an “interested party” such as a realtor or the property seller if you are buying a home.
For FHA mortgages, the person who makes the payments must be listed as a borrower on the loan or an account holder. So even if someone has paid a loan on your behalf for over a year, if you are the only borrower listed on the loan, the monthly payments are included in your application for an FHA loan.
If you are a co-borrower on a mortgage but do not actually make the payments, that mortgage payment as well as the property tax and homeowners insurance may also be excluded from your debt-to-income ratio. A mortgage payment can only be omitted, however, if the person who has made the payments is also a co-borrower on the mortgage. You also cannot use rental income from the property to qualify for the mortgage.
Regardless of loan type, if you want to exclude a loan from your debt-to-income ratio because someone else pays it, you must provide the lender twelve months of documentation such as cancelled checks, bank statements or a similar document from the person who makes the payments. Additionally, the payments must be made in full and on time for at least a year.
In conclusion, while almost all loans are counted as debt when you apply for a mortgage, there are a small number of cases when loan payments can be excluded from your application. Excluding a payment can improve your debt-to-income ratio and boost the mortgage you can afford.
We recommend that you contact multiple lenders in the table below to understand their qualification guidelines and to confirm the loan you qualify for. Shopping lenders is also the best way to save money on your mortgage.
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Sources
"B3-6-05, Installment Debt." Selling Guide: Fannie Mae Single Family. Fannie Mae, February 5 2020. Web.
"B3-6-05, Debts Paid by Others." Selling Guide: Fannie Mae Single Family. Fannie Mae, February 5 2020. Web.
"II.A.4.b.iv.(A). General Liabilities and Debts (TOTAL) ." FHA Single Family Housing Policy Handbook 4000.1. Federal Housing Administration, January 2 2020. Web.
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