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When can business debt be excluded from the DTI ratio?

Business Debt in Borrower’s Name

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. 

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

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