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FAQs: Monthly Debt Obligations

Top Lender Questions on Monthly Debt Obligations

A borrower's monthly debt obligations must be considered when underwriting a loan. To support our customers in understanding requirements for the various types of monthly debt obligations, see the FAQs below that are broken out by trending categories. For more information, refer to B3-6-05, Monthly Debt Obligations in the Selling Guide

 

Alimony, Child Support, and Separate Maintenance Payments

  1. Can I exclude the credit report mortgage payment history if my borrower is separated but not yet divorced? 

It depends on the date of the court-ordered assignment of debt. Prior to that date, the borrower would have liability to the creditor. After that date, the lender can disregard the borrower's payment history for that debt. 

  1. Can separate maintenance payments be deducted from income in the same way as alimony payments?

The definitions of separate maintenance and alimony are state-specific. If state law allows for similar treatment, separate maintenance may be treated the same as alimony.

  1. In what situations may a divorce decree or separation agreement be required?

A divorce decree, separation agreement, or property settlement agreement may be required under the following circumstances:

  • Refinances to Buy Out An Owner’s Interest
  • Cash-out Refinance Transaction
    • To document that the borrower was legally awarded the property (divorce, separation, or dissolution of a domestic partnership) to support that a six month waiting period is not required. Refer to B2-1.3-03, Cash-Out Refinance Transactions for complete details.
  • Verification of Income From Alimony, Child Support, or Separate Maintenance
    • To document the amount of the award, the period of time over which it will be received, and that it will continue to be paid for at least three years after the date of the mortgage application, as verified by a copy of a divorce decree or separation agreement (if the divorce is not final). If a borrower who is separated does not have a separation agreement that specifies alimony or child support payments, the lender should not consider any proposed or voluntary payments as income. Refer to B3-3.1-09, Other Sources of Income for complete details.
  • Extenuating Circumstances
  • Alimony/Child Support/Separate Maintenance Payments
    • When the borrower is required to pay alimony, child support, or maintenance payments under a divorce decree, separation agreement, or any other written legal agreement—and those payments must continue to be made for more than ten months. 
  • Court-Ordered Assignment of Debt
    • To document that an outstanding debt was assigned to another party by court order such as under a decree or separation agreement. 
  1. What is required for child support or alimony obligations?

When the borrower is required to pay alimony, child support, or separate maintenance payments under a divorce decree, separation agreement, or any other written legal agreement—and those payments must continue to be made for more than ten months—the payments must be considered as part of the borrower’s recurring monthly debt obligations. However, voluntary payments do not need to be taken into consideration and an exception is allowed for alimony. A copy of the divorce decree, separation agreement, court order, or equivalent documentation confirming the amount of the obligation must be obtained and retained in the loan file.

For alimony and separate maintenance obligations, the lender has the option to reduce the qualifying income by the amount of the obligation in lieu of including it as a monthly payment in the calculation of the DTI ratio.

Note: For loan casefiles underwritten through DU, when using the option of reducing the borrower’s monthly qualifying income by the alimony or separate maintenance payment, the lender must enter the amount of the monthly obligation as a negative alimony or separate maintenance income amount. (If the borrower also receives alimony or separate maintenance income, the amounts should be combined and entered as a net amount.)

 

Bridge Loan

  1. How do I treat a monthly obligation on a bridge loan?

Bridge/ Swing Loans

A bridge (or swing) loan is an acceptable source of funds provided the following requirements are met:

  • The bridge loan cannot be cross-collateralized against the new property.
  • The lender must document the borrower’s ability to successfully carry the payments for the new home, the current home, the bridge loan, and other obligations.

Fannie Mae does not have a specified limitation on the term of bridge loans.

Treating the Resulting Contingent Liability

When a borrower obtains a bridge (or swing) loan, the funds from that loan can be used for closing on a new principal residence before the current residence is sold. This creates a contingent liability that must be considered part of the borrower’s recurring monthly debt obligations and included in the DTI ratio calculation.

Fannie Mae will waive this requirement and not require the debt to be included in the DTI ratio if the following documentation is provided:

  • a fully executed sales contract for the current residence, and
  • confirmation that any financing contingencies have been cleared.

For additional information, see B3-4.3-14, Bridge/Swing Loans and B3-6-05, Monthly Debt Obligations.

 

Business Debt in Borrower's Name

  1. How is commercial lien debt evaluated?

If the borrower is personally liable for the debt, then the lender must document the obligation and include the payment in the DTI ratio as applicable. If the borrower is using rental income from the rental property that secures the commercial loan, then the lender must follow the requirements in B3-3.1-08, Rental Income

  1. When can business debt be excluded from the DTI ratio?

When a self-employed borrower claims that a monthly obligation that appears on his or her personal credit report (such as a Small Business Administration loan) is being paid by the borrower’s business, the lender must confirm that it verified that the obligation was actually paid out of company funds and that this was considered in its cash flow analysis of the borrower’s business.

The account payment does not need to be considered as part of the borrower’s DTI ratio if:

  • the account in question does not have a history of delinquency,
  • the business provides acceptable evidence that the obligation was paid out of company funds (such as 12 months of canceled company checks), and
  • the lender’s cash flow analysis of the business took payment of the obligation into consideration.

The account payment must be considered as part of the borrower’s DTI ratio in any of the following situations:

  • If the business does not provide sufficient evidence that the obligation was paid out of company funds.
  • If the business provides acceptable evidence of its payment of the obligation, but the lender’s cash flow analysis of the business does not reflect any business expense related to the obligation (such as an interest expense—and taxes and insurance, if applicable—equal to or greater than the amount of interest that one would reasonably expect to see given the amount of financing shown on the credit report and the age of the loan). It is reasonable to assume that the obligation has not been accounted for in the cash flow analysis.
  • If the account in question has a history of delinquency. To ensure that the obligation is counted only once, the lender should adjust the net income of the business by the amount of interest, taxes, or insurance expense, if any, that relates to the account in question. 

 

Debt Paid by Others/ Non-Applicant Accounts

  1. Can loans using the debts paid by others option be manually underwritten?

Yes, this option can be underwritten through DU and manually.

  1. How are non-applicant accounts handled?

Credit reports may include accounts identified as possible non-applicant accounts (or with other similar notation). Non-applicant accounts may belong to the borrower, or they may truly belong to another individual.

Typical causes of non-applicant accounts include:

  • applicants who are Juniors or Seniors,
  • individuals who move frequently,
  • unrelated individuals who have identical names, and
  • debts the borrower applied for under a different Social Security number or under a different address. These may be indicative of potential fraud.

If the debts do not belong to the borrower, the lender may provide supporting documentation to validate this, and may exclude the non-applicant debts from the borrower’s DTI ratio. If the debts do belong to the borrower, they must be included as part of the borrower’s recurring monthly debt obligations.

  1. If someone else pays only a portion of the non-mortgage debt is all of the non-mortgage debt excluded in the DTI ratio or only the portion that is paid by another?

In order for the debt to be excluded from the debt-to-income (DTI) ratio, the other party has to pay the complete monthly obligation every month for a minimum of 12 months. 

  1. When can debt paid by others be excluded from the DTI ratio?

Certain debts can be excluded from the borrower’s recurring monthly obligations and the DTI ratio:

  • When a borrower is obligated on a non-mortgage debt - but is not the party who is actually repaying the debt - the lender may exclude the monthly payment from the borrower's recurring monthly obligations. This policy applies whether or not the other party is obligated on the debt, but is not applicable if the other party is an interested party to the subject transaction (such as the seller or realtor). Non-mortgage debts include installment loans, student loans, revolving accounts, lease payments, alimony, child support, and separate maintenance. 
  • When a borrower is obligated on a mortgage debt - but is not the party who is actually repaying the debt - the lender may exclude the full monthly housing expense (PITIA) from the borrower’s recurring monthly obligations if
    • the party making the payments is obligated on the mortgage debt,
    • there are no delinquencies in the most recent 12 months, and
    • the borrower is not using rental income from the applicable property to qualify.

In order to exclude non-mortgage or mortgage debts from the borrower’s DTI ratio, the lender must obtain the most recent 12 months' cancelled checks (or bank statements) from the other party making the payments that document a 12-month payment history with no delinquent payments.

When a borrower is obligated on a mortgage debt, regardless of whether or not the other party is making the monthly mortgage payments, the referenced property must be included in the count of financed properties (if applicable per B2-2-03, Multiple Financed Properties for the Same Borrower).

 

Debt to Income Ratio

  1. What is included in the total monthly debt obligation?

The total monthly debt obligation is the sum of the following:

  •  the housing payment for each borrower’s principal residence
  • the qualifying payment amount if the subject loan is for a second home or investment property (see B3-6-04, Qualifying Payment Requirements);
  • monthly payments on installment debts and other mortgage debts that extend beyond ten months;
  • monthly payments on installment debts and other mortgage debts that extend ten months or less if the payments significantly affect the borrower’s ability to meet credit obligations;
  • monthly payments on installment debts secured by virtual currency;
  • monthly payments on revolving debts;
  • monthly payments on lease agreements, regardless of the expiration date of the lease;
  • monthly alimony, child support, or maintenance payments that extend beyond ten months (alimony (but not child support or maintenance) may instead be deducted from income, see B3-6-05, Monthly Debt Obligations);
  • monthly payments for other recurring monthly obligations; and
  • any net loss from a rental property.

Note: Fannie Mae acknowledges that lenders may sometimes apply a more conservative approach when qualifying borrowers. This is acceptable as long as Fannie Mae’s minimum requirements are met, and lenders consistently apply the same approach to similar loans. For example, a lender might calculate a higher minimum payment on a credit card account than what Fannie Mae requires, which is acceptable as long as the lender consistently applies this calculation to all mortgage applications with revolving debts. For additional information, see B3-6-02, Debt-to-Income Ratios.

  1. What is required if additional debt or reduced income is discovered after the underwriting decision?

Fannie Mae expects lenders to have in place processes to facilitate borrower disclosure of changes in financial circumstances throughout the origination process and prefunding quality control processes to increase the likelihood of discovering material undisclosed debts or reduced income. See D1-2-01, Lender Prefunding Quality Control Review Process.

As a result of the lender's normal processes and controls, the lender may need to re-underwrite the loan after initial underwriting. If the borrower discloses or the lender discovers additional debt(s) or reduced income after the underwriting decision was made up to and concurrent with loan closing, the loan must be re-underwritten if the new information causes the DTI ratio to increase by more than the allowed tolerances.

In all cases, if the lender determines that there is new subordinate financing on the subject property during the loan process, the mortgage loan must be re-underwritten.

Note: Re-underwriting means that loan casefiles must be resubmitted to DU with updated information; and for manually underwritten loans, a comprehensive risk and eligibility assessment must be performed.

For complete details, see B3-6-02, Debt-to-Income Ratios.

 

Deferred Non Mortgage Debt 

  1. How should I treat non-mortgage debt (for example, student loans, auto loans, etc.) currently in forbearance or deferment?  

Regardless of whether the forbearance or deferment is related to COVID-19, lenders must consider the monthly debt payment in the borrower’s DTI.  For mortgage loans underwritten using DU, DU will provide guidance on the treatment of the debt, and lenders do not need to conduct additional analysis.  For mortgage loans that are manually underwritten, lenders must follow  B3-5.3-02, Payment History. However, lenders are not required to, and should not, consider payments missed during the time of a COVID-19-related forbearance to be historical delinquencies or derogatory credit. 

For student loans, if the monthly payment is provided on the credit report, the lender may use that amount for qualifying purposes. If the credit report does not provide a monthly payment for the student loan, or if the credit report shows $0 as the monthly payment, the lender must either calculate a qualifying payment per B3-6-05, Monthly Debt Obligations, or use the most recent income-driven repayment plan payment (with supporting documentation).

  1. Does the lender need to consider a Paycheck Protection Program (PPP) loan in the borrower’s DTI?

Under the CARES Act, PPP loan terms allow deferred payments for a specified period, no personal loan guarantee, and the potential for all or some portion of the loan to be forgiven. Therefore, no payments would be expected to be included in the borrower’s liabilities at this time. Once it has been determined that any portion of the PPP loan must be repaid, follow the Selling Guide requirements for loans paid by a business.

 

Federal Income Tax Installment Agreements

  1. What is the policy on Federal Income Tax Installment Agreements?

When a borrower has entered into an installment agreement with the IRS to repay delinquent federal income taxes, the lender may include the monthly payment amount as part of the borrower’s monthly debt obligations (in lieu of requiring payment in full) if:

  • There is no indication that a Notice of Federal Tax Lien has been filed against the borrower in the county in which the subject property is located. 
  • The lender obtains the following documentation:
    • an approved IRS installment agreement with the terms of repayment, including the monthly payment amount and total amount due; and
    • evidence the borrower is current on the payments associated with the tax installment plan. Acceptable evidence includes the most recent payment reminder from the IRS, reflecting the last payment amount and date and the next payment amount owed and due date. At least one payment must have been made prior to closing.

As a reminder, lenders remain responsible under the life-of-loan representations and warranties for clear title and first-lien enforceability in accordance with A2-2-07, Life-of-Loan Representations and Warranties.

The payments on a federal income tax installment agreement can be excluded from the borrower’s DTI ratio if the agreement meets the terms in Debts Paid by Others or Installment Debt described in B3-6-05, Monthly Debt Obligations. If any of the above conditions are not met, the borrower must pay off the outstanding balance due under the installment agreement with the IRS in accordance with B3-6-07, Debts Paid Off At or Prior to Closing

  1. Why does the policy on Federal Income Tax Installment Agreements exclude repayment of delinquent state and local taxes?

We did not establish a policy for repayment of delinquent state or local taxes because taxing statutes vary by state and local jurisdiction.  By contrast, federal income tax installment agreements are consistent with their priority governed by federal law and regulation.

 

Garnishments/ Court-Ordered Assignment of Debt

  1. How is a contingent liability considered for court-ordered assignment of debt?

When a borrower has outstanding debt that was assigned to another party by court order (such as under a divorce decree or separation agreement) and the creditor does not release the borrower from liability, the borrower has a contingent liability. The lender is not required to count this contingent liability as part of the borrower’s recurring monthly debt obligations. 

The lender is not required to evaluate the payment history for the assigned debt after the effective date of the assignment. The lender cannot disregard the borrower’s payment history for the debt before its assignment.

  1. What is the policy on garnishments?

All garnishments with more than ten months remaining must be included in the borrower’s recurring monthly debt obligations for qualifying purposes.

 

Installment Debt

  1. Is deferred installment debt included in recurring monthly debt obligations?

Deferred installment debts must be included as part of the borrower’s recurring monthly debt obligations. For deferred installment debts other than student loans, if the borrower’s credit report does not indicate the monthly amount that will be payable at the end of the deferment period, the lender must obtain copies of the borrower’s payment letters or forbearance agreements so that a monthly payment amount can be determined and used in calculating the borrower’s total monthly obligations. 

  1. What are the requirements for installment debt?

All installment debt that is not secured by a financial asset—including student loans, automobile loans, personal loans, and timeshares—must be considered part of the borrower’s recurring monthly debt obligations if there are more than ten monthly payments remaining. However, an installment debt with fewer monthly payments remaining also should be considered as a recurring monthly debt obligation if it significantly affects the borrower’s ability to meet his or her credit obligations. 

Lease payments must be considered as recurring monthly debt obligations regardless of the number of months remaining on the lease. This is because the expiration of a lease agreement for rental housing or an automobile typically leads to either a new lease agreement, the buyout of the existing lease, or the purchase of a new vehicle or house.

Note: A timeshare account should be treated as an installment debt regardless of how it is reported on the credit report or other documentation (that is, even if reported as a mortgage loan).

 

Lease Payments/ Rental Housing Payments

  1. How are monthly lease payments considered in the DTI ratio?

Lease payments must be considered as recurring monthly debt obligations regardless of the number of months remaining on the lease. This is because the expiration of a lease agreement for rental housing or an automobile typically leads to either a new lease agreement, the buyout of the existing lease, or the purchase of a new vehicle or house. 

  1. What is required to evaluate a rental housing payment?

The housing payment for each borrower’s principal residence must be considered when underwriting the loan. For the following scenarios, the borrower’s monthly rental housing payment must be evaluated (if the borrower does not otherwise have a mortgage payment or no housing expense): 

  • for non-occupant borrowers, and 
  • for second homes or investment properties.

The following list provides examples of acceptable documentation to verify the rental payment: 

  • six months canceled checks or equivalent payment source; 
  • six months bank statements reflecting a clear and consistent payment to an organization or individual; 
  • direct verification of rent from a management company or individual landlord; or 
  • a copy of a current, fully executed lease agreement and two months canceled checks (or equivalent payment source) supporting the rental payment amount. 

Note: Refer to B3-5.4-03, Documentation and Assessment of a Nontraditional Credit History for rental payment history requirements when using non-traditional credit.

 

Revolving Charge/ Lines of Credit

  1. Are revolving charge accounts and lines of credit considered long-term debts?

Revolving charge accounts and unsecured lines of credit are open-ended and should be treated as long-term debts and must be considered part of the borrower's recurring monthly debt obligations. These tradelines include credit cards, department store charge cards, and personal lines of credit. Equity lines of credit secured by real estate should be included in the housing expense. 

If the credit report does not show a required minimum payment amount and there is no supplemental documentation to support a payment of less than 5%, the lender must use 5% of the outstanding balance as the borrower's recurring monthly debt obligation.

For DU loan casefiles, if a revolving debt is provided on the loan application without a monthly payment amount, DU will use the greater of $10 or 5% of the outstanding balance as the monthly payment when calculating the total debt-to-income ratio.

  1. What if the credit report does not show a minimum payment for a revolving charge or personal line of credit? 

Revolving charge accounts and unsecured lines of credit are open-ended and should be treated as long-term debts and must be considered part of the borrower's recurring monthly debt obligations. These tradelines include credit cards, department store charge cards, and personal lines of credit. Equity lines of credit secured by real estate should be included in the housing expense.

If the credit report does not show a required minimum payment amount and there is no supplemental documentation to support a payment of less than 5%, the lender must use 5% of the outstanding balance as the borrower's recurring monthly debt obligation.

For DU loan casefiles, if a revolving debt is provided on the loan application without a monthly payment amount, DU will use the greater of $10 or 5% of the outstanding balance as the monthly payment when calculating the total debt-to-income ratio.

  1. When is a HELOC payment required to be included in the monthly debt obligation?

When the mortgage that will be delivered to Fannie Mae also has a home equity line of credit (HELOC) that provides for a monthly payment of principal and interest or interest only, the payment on the HELOC must be considered as part of the borrower’s recurring monthly debt obligations.

If the HELOC does not require a payment, there is no recurring monthly debt obligation so the lender does not need to develop an equivalent payment amount.

For additional information, see B3-6-05, Monthly Debt Obligations.

 

Student Loans

  1. Where can I find answers to questions on student loans?

See FAQs: Student Loan Debt Requirements and B3-6-05, Monthly Debt Obligations of the Selling Guide.

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