HB-1-3555
(03-09-16) SPECIAL PN 11-1
Revised (08-05-24) PN 621
CHAPTER 11: RATIO ANALYSIS
11.1 INTRODUCTION
Ratio calculations are used to determine if the applicants’ repayment income can
reasonably be expected to meet the anticipated monthly housing expense and total
monthly obligations involved in homeownership. The Agency has established standards
for principal, interest, taxes, and insurance (PITI) and total debt (TD) ratios; however in
some instances, there is flexibility to apply these standards when valid compensating
factors are present.
11.2 THE RATIOS [7 CFR 3555.151(h)(1)(i)]
Ratios are calculated by utilizing the repayment income, as determined by the lender
in Chapter 9, Section 2 of this Handbook. To qualify for a guarantee, borrowers must
meet the Agency’s standards for both the PITI and TD ratios.
A. The PITI Ratio
Applicants are considered to have repayment ability if their proposed monthly
housing expense does not exceed 34 percent of their repayment income. Monthly
housing expenses include:
• First Mortgage (P&I);
• Subordinate Lien(s);
• Homeowner’s Insurance;
• Supplemental Property Insurance;
• Property Taxes;
• Mortgage Insurance (First year annual fee monthly amount);
• Association/Project Dues (Condo, Co-Op, PUD); and
• Other.
B. The Total Debt Ratio
Applicants are considered to have repayment ability when their total debts do not
exceed 41 percent of their repayment income.
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Paragraph 11.2 The Ratios
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The total debt ratio includes monthly housing expense (PITI) plus other monthly
credit or debt obligations incurred by the applicants.
The lender must document the applicants’ debts through various records including,
but not limited to, credit reports, direct or third-party verifications, court documents, and
verification of deposits. All open debts/accounts (including non-medical collection
accounts and judgments) incurred through the closing date must be considered in the total
debt calculation and documented in GUS and the loan application, as applicable.
Amounts listed on the credit report will be used unless verification supports an alternate
payment amount. If an amount other than that shown on the credit report is used, the
lender will provide documentation of the amount utilized. This documentation will be
uploaded with the final submission to Agency.
The following obligation expenses must be included in the monthly debts:
1. PITI
• First Mortgage (P&I), property taxes, homeowner’s insurance, mortgage
insurance (first year annual fee monthly amount), association/project dues,
other.
2. Installment accounts
• Accounts that will be paid in full through a specified number of fixed
payments such as auto, personal, secured/unsecured, etc. must have the
monthly payment included.
• If ten or less months of repayment remains per the credit report, creditor
verification, etc., the monthly debt may be omitted if the payment does not
exceed five percent of the monthly repayment income.
• Installment debt may be paid down to ten months or less of remaining debt.
3. Revolving accounts
• Credit cards, lines of credit, secured/unsecured loans, etc. must include the
minimum monthly payment documented on the credit report or other creditor
verification in the total debts.
• If the credit report shows an outstanding balance, but no minimum monthly
payment, the payment must be calculated as five percent of the balance
reported on the credit report.
HB-1-3555
Paragraph 11.2 The Ratios
(03-09-16) SPECIAL PN 11-3
Revised (08-05-24) PN 621
• The lender may obtain a current account statement or creditor verification to
document the actual monthly payment and include that amount in the monthly
debts.
• Revolving accounts with no outstanding balance on the credit report do not
require an estimated payment to be included in the debt ratio.
• Revolving accounts with no outstanding balance are not required to be closed.
4. Open 30-Day Accounts
• A 30-day account is a credit arrangement requiring the applicant to pay off the
full outstanding balance on the account every month.
• The lender may utilize the credit report to document the applicant has paid the
outstanding balance for the previous 12 months.
• If the credit report reflects late payments in the last 12 months, the lender
must include five percent of the outstanding balance in the monthly debts.
• 30-day accounts that are paid monthly in full are not included in the total debt
ratio.
5. Court Ordered Debts: Child support, alimony, garnishments, etc.
• Court ordered debts must have the payment included in the total debt ratio
unless the applicant has a release of liability from the court/creditor and
acceptable evidence is documented.
• Lenders will utilize select pages from the applicable agreement/court order to
document the required monthly payment due and the duration of the debt.
• Court ordered debts with ten or less payments remaining may be excluded if
the payment does not exceed five percent of the monthly repayment income.
• For GUS transactions, the lender will manually enter the obligation(s) as a
monthly liability. When the obligation account is entered as “other,” the
lender will specify what the obligation is (i.e. court ordered child support). A
manual entry of this monthly obligation does not require an underwriting
recommendation of “Accept” to be downgraded to a “Refer.”
• Lenders must confirm repayment agreements are current. Refer to Chapter 10
for court ordered debt guidance and program eligibility.
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Paragraph 11.2 The Ratios
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6. Child Care Expenses
• Child care expenses are not required to be included in the monthly debt ratio.
7. Student loans
• For outstanding student loans, regardless of the payment status, lenders must
use:
o The payment amount reported on the credit report or the actual
documented payment, when the payment amount is above zero; or
o One half (.50) percent of the outstanding loan balance documented on the
credit report or creditor verification, when the payment amount is zero.
• Student loans in the applicant’s name alone but paid by another party remain
the legal responsibility of the applicant. The applicable payment must be
included in the monthly debts.
• Student loans in a “forgiveness” plan/program remain the legal responsibility
of the applicant until they are released of liability from the creditor. The
applicable payment must be included in the monthly debts.
• Co-signed obligations are addressed below in section 11.
8. Mortgages: Rental Property
• A GUS Accept recommendation will not require a manual downgrade to a
Refer when the net monthly rental income is negative.
• Income received from rents may only be counted for repayment if received for
24 months or more. Rental income received for less than 24 months should
not be entered into GUS as rental income.
• If the credit report reflects late mortgage payments on the rental dwelling in
the 12 months prior to loan application, the full mortgage liability and all
associated costs must be included in the monthly debts.
• Refer to Chapter 9 for rental income guidance.
9. Mortgages: No Release of Liability
• Mortgage liabilities disposed of through a sale, trade, or transfer without a
release of liability (i.e. the borrower remains on the promissory note) must be
HB-1-3555
Paragraph 11.2 The Ratios
(03-09-16) SPECIAL PN 11-5
Revised (08-05-24) PN 621
included in the total debt ratio unless evidence can be obtained to confirm the
remaining party/new owner has successfully made the payment for the
previous 12 months prior to loan application.
• Evidence may be reported through the credit report or verification from the
creditor/servicer to document the payment history has been current for the 12
months prior to loan application.
• If there are late payments in the previous 12 months prior to loan application,
the full mortgage obligation must be included in the monthly debt.
10. Mortgages: Divorce
• In the case of a divorce, the lender must obtain a copy of the legal separation
agreement or divorce decree to document the remaining party/new owner is
responsible to pay all mortgage debts from the effective date of the decree
forward.
• To exclude the mortgage debt, the lender must document the previous 12
months have been paid as agreed prior to loan application through the credit
report or verification from the creditor/servicer.
• If there are late payments in the previous 12 months prior to loan application,
the full mortgage obligation must be included in the monthly debts.
11. Co-signed obligations
• Co-signed debts refer to debts where the applicant may be a co-borrower, joint
obligor, co-signer, guarantor, etc.
• Co-signed debts must be included in the monthly debts unless the applicants
provide evidence another obligor (party to the debt) has successfully made the
payment for the previous 12 months prior to loan application.
• Acceptable evidence includes, but is not limited to, canceled checks, money
order receipts, and/or bank statements of the co-obligor.
• Late payments reported in the previous 12 months prior to application will
require the monthly liability to be included in the monthly debts.
• If the applicant can provide conclusive evidence from the creditor that they
will not pursue debt collection against the applicant should the other party
default, the 12-month payment history of the additional party is not required.
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Paragraph 11.2 The Ratios
11-6
• Debts identified as “individual” on a credit report must be included in the debt
ratio regardless of who is making the monthly payment (e.g. parents paying
car payments on behalf of applicant and the loan is solely in the applicant’s
name).
12. Business debts
• Business debts (e.g. car loan) reported on the applicants’ personal credit report
may be omitted from the monthly debt if there is evidence the debt is paid
through a business account.
• Acceptable evidence includes canceled checks or bank statements from a
business account for the previous 12 months.
• Payments paid by the business must be included on the cash flow analysis
and/or profit and loss statement, when applicable.
13. 401(k) loans/personal asset loans
• Loans pledging personal assets, such as a 401(k) account, retirement funds,
savings account, or other liquid assets do not require a payment to be included
in the monthly debts.
14. Debts of a non-purchasing spouse (NPS)
• Applicants who currently reside or are purchasing in a community property
state must include the debts of the NPS unless specifically excluded by state
law.
• Approved lenders are responsible to confirm state laws are met.
15. Collection accounts
• Refer to Chapter 10 for collection account guidance.
16. Judgment accounts
• Refer to Chapter 10 for Federal and non-Federal judgment guidance.
17. Charge-off accounts
• Refer to Chapter 10 for charge-off account guidance.
HB-1-3555
Paragraph 11.2 The Ratios
(03-09-16) SPECIAL PN 11-7
Revised (08-05-24) PN 621
18. Expense allowances (including Automobile Allowances)
• An automobile or other expense allowance will not cancel out a monthly debt
for an automobile or expense loan/debt.
• The full amount of the monthly debt associated with the expense (such as a
car or equipment payment) must be included in the total debt ratio calculation.
• For guidance on calculating income for expense allowances, refer to Chapter
9.
19. Balloon/deferred payments.
• Deferred debts and balloon debts that will require payment in full upon their
due date must have a payment included in the monthly debts. When the
balloon/deferred payment loan is due within 12 months, the lender must
evaluate the complete loan application to make a determination regarding the
applicants’ repayment ability.
• If the actual payment on a deferred/balloon loan is unknown, the lender may
obtain documentation from the creditor to establish a monthly payment that
will be due on a documented payment date, or they must use five percent of
the outstanding balance on the credit report or creditor verification.
20. Tax repayment agreements
• Include Federal or State income tax repayment plan payments in the monthly
debt.
• If ten or less months of repayment remains per the plan, the monthly debt may
be excluded if the payment does not exceed five percent of the monthly
repayment income.
• Refer to Chapter 10 for Federal Income Tax agreement eligibility.
21. Lease payments
• Auto, solar, energy, and additional lease payments must have the payment
included in the monthly debt regardless of months remaining to pay on the
contract.
22. Debt management plans
• Include the monthly payment amount due from the counseling plan.
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Paragraph 11.2 The Ratios
11-8
• Refer to Chapter 10 for guidance on credit exception and documentation
requirements.
11.3 DEBT RATIO WAIVERS AND COMPENSATING FACTORS [7 CFR
3555.151(h)(3)]
The applicants’ Total Debt ratio may exceed 41 percent if the lender determines that
strong compensating factors demonstrate that the household has higher repayment ability.
No waivers are permitted to increase the PITI ratio above 34 percent for purchase
transactions.
A. Purchase Transactions: Debt ratio waivers
1. GUS Accept loans:
GUS files that receive an Accept or Accept Full Documentation underwriting
recommendation do not require a debt ratio waiver.
2. GUS Refer, Refer with Caution, and manually underwritten loans without GUS
assistance:
The lender must document eligible compensating factors to support a debt
ratio waiver. Agency approval of a lender’s request for the Total Debt ratio to
exceed 41 percent may be granted if all of the following conditions are met:
• Acceptable ratio thresholds are met:
o The maximum PITI ratio cannot exceed 34 percent, and
o The maximum TD ratio cannot exceed 44 percent;
• The validated credit score of all applicants is 680 or greater;
• At least one of the acceptable compensating factors listed below is
identified. Supporting documentation is provided to the Agency and
maintained in the lender’s permanent file. Acceptable Compensating
Factors and Supporting Documentation:
o Accumulated savings or cash reserves available post loan closing are
equal to or greater than three months of PITI payments.
Documentation may include a verification of deposit (VOD) or bank
statements that meet the requirements of Chapter 9. Cash on hand is
not eligible for consideration as a compensating factor.
HB-1-3555
Paragraph 11.3 Debt Ratio Waivers and Compensating Factors
(03-09-16) SPECIAL PN 11-9
Revised (08-05-24) PN 621
o The applicant(s) (all employed applicants) has been continuously
employed with their current primary employer for a minimum of two
years. A Request for Verification of Employment (VOE) (Form RD
1910-5, comparable HUD, FHA, VA or Fannie Mae form, or other
equivalent), or a VOE prepared by an employment verification service
(e.g. The Work Number) must be provided. Applicants that have
received Social Security benefits or retirement income for two years
may utilize this compensating factor with documentation to support
the history of receipt of benefits. This compensating factor is not
applicable for self-employed applicants.
o The proposed PITI does not exceed the applicant’s current verified
housing expense by more than $100 or 5 percent, whichever is less, for
the 12-month period preceding loan application. Verification of
housing expenses may be documented on a Verification of Rent
(VOR), Verification of Mortgage (VOM), or credit report, as noted in
Chapter 10. The VOR, VOM, or credit report must include the actual
payment due and report no more than one 30 day late payment for the
previous 12 months. Rent or mortgage payment histories from a family
member or interested party will not be considered unless 12 months of
canceled checks, money order receipts, or electronic payment
confirmations are provided. A history of less than 12 months will not
be considered an acceptable compensating factor.
o The subject property is an energy efficient home based on the
International Energy Conservation Code (IECC) standards, defined as:
• For new construction, the dwelling meets or exceeds the IECC in
effect at the time of construction. The lender is responsible for
verifying the home meets the IECC standards, with evidence
maintained in the lender’s permanent loan file. Refer to Chapter 12
for guidance in documenting thermal standards for new
construction dwellings.
• For existing dwellings, the dwelling meets or exceeds the current
IECC. Existing dwellings that have been retrofitted to meet the
current IECC standards are eligible. The lender is responsible for
verifying the home meets the current IECC standards, with
evidence maintained in the lender’s permanent loan file.
HB-1-3555
Paragraph 11.3 Debt Ratio Waivers and Compensating Factors
11-10
• Debt Ratio Waiver Request and Agency Approval:
o Debt ratio waivers must be requested and documented by the approved
lender. The lender requests Agency concurrence with the debt ratio
waiver by submitting an underwriting analysis that cites one or more
of the above acceptable compensating factors. Lenders may utilize
Fannie Mae 1008 / Freddie Mac 1077, Uniform Underwriting and
Transmittal Summary, or similar form. Evidence of the compensating
factor, such as a VOR, VOD, and/or VOE, must be submitted to the
Agency for approval.
o The issuance of the Conditional Commitment for a Loan Note
Guarantee represents Agency approval of the ratio waiver.
B. Refinance Transactions: Debt ratio waivers
1. GUS Accept loans:
• GUS files that receive an Accept or Accept Full Documentation underwriting
recommendation do not require debt ratio waivers.
2. GUS Refer, Refer with Caution, and manually underwritten loans without GUS
assistance:
• GUS files that receive a GUS recommendation of Refer, Refer with Caution,
or are not supported by GUS require debt ratio waivers, and supporting
documentation must be submitted to the Agency.
• Streamlined-assist refinance loans do not require debt ratio calculations, and
therefore no debt ratio waiver.
• Debt ratios for refinance loans are not limited to the maximum purchase debt
ratio thresholds.
• The following are examples of acceptable compensating factors for debt ratio
waiver requests:
o Validated credit score of 680 or higher for all applicants.
o The proposed PITI does not exceed the borrower’s current verified
mortgage payment by more than $100 or 5 percent, whichever is less, for
the 12-month period preceding loan application.
HB-1-3555
Paragraph 11.3 Debt Ratio Waivers and Compensating Factors
(03-09-16) SPECIAL PN 11-11
Revised (08-05-24) PN 621
o Accumulated savings or cash reserves available post-closing are equal to
or greater than three months of the proposed PITI payment. Cash on hand
is not eligible for consideration as a compensating factor.
o Continuous employment with the current primary employer.
o The subject property is an energy efficient home, defined as a dwelling
which meets or exceeds the current International Energy Conservation
Code (IECC). Existing dwellings that have been retrofitted to meet the
current IECC standards are eligible. The lender is responsible for verifying
the home meets the current IECC standards, with evidence maintained in
the lender’s permanent loan file.
• The issuance of the Conditional Commitment for a Loan Note Guarantee
represents Agency approval of the ratio waiver.
11.4 MORTGAGE CREDIT CERTIFICATES
Authorized State or local housing finance agencies may issue a mortgage credit
certificate (MCC) that provides a federal income tax credit to a qualified first-time
homebuyer and/or low- or moderate-income homebuyer. Refer to Chapter 9 for MCC
guidance and GUS data entry.
11.5 FUNDED BUYDOWN ACCOUNTS
Funded buydown accounts are designed to reduce the borrower’s monthly payment
during the initial years (temporary buydown) or the full life (permanent buydown) of the
loan. Permanent buydowns are fully funded and paid for at loan closing. The interest
rate is fixed and will not change for the life of the loan. Temporary buydowns are
eligible when the following guidelines are met:
• The mortgage loan must be underwritten at the full note rate. Both the full note
rate and the initial buydown rate must be entered into GUS;
• Buydown funds may come from the seller, lender or other third party;
• Buydown funds may not come from the borrower;
• The buydown must not reduce the interest rate more than two percent below the
full note rate;
• The assistance may increase no more than one percent annually;
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Paragraph 11.5 Funded Buydown Accounts
11-12
• The borrower must agree in writing that the temporary buydown funds will be
placed in an escrow with a financial institution supervised by a federal or state
agency and paid directly to the lender each month to reduce the monthly mortgage
payment;
• The buydown account must be fully funded at origination; and
• A copy of the executed escrow agreement must be retained in the lender’s
permanent loan file.
11.6 SECTION 8 HOMEOWNERSHIP VOUCHERS
Section 8 Homeownership Vouchers may be used for qualifying applicants. Refer to
Chapter 9 for voucher guidance and GUS data entry.
11.7 OBLIGATIONS NOT INCLUDED IN DEBT-TO-INCOME RATIOS
Obligations not considered or included in total debt-to-income ratio calculations
include:
• Medical collections;
• Medical payments;
• Federal, state, and local taxes, unless a payment plan is in place;
• Federal Insurance Contribution Act (FICA) contributions;
• Other retirement contributions such as 401(k) accounts, including the repayment
of loans secured by 401(k) funds;
• Automatic deductions to savings accounts, mutual funds, stocks, bonds,
certificates of deposit, including the repayment of loans secured by such funds;
• Collateralized loans secured by depository accounts;
• Utilities;
• Insurance, other than property insurance;
• Commuting costs;
• Union dues;
HB-1-3555
Paragraph 11.7 Obligations Not Included in Debt-to-Income Ratios
(03-09-16) SPECIAL PN 11-13
Revised (08-05-24) PN 621
• Open accounts with zero balances;
• Child care; and
• Voluntary deductions.
All liabilities disclosed by the applicant should be listed in GUS. The lender may
“omit” liabilities as permitted.
