Excluding Installment Debts from your FHA Mortgage Approval

When applying for a mortgage, the mortgage underwriter will calculate what is known as a Debt to Income ratio. This ratio, often shortened to the acronym “DTI”, can make or break your mortgage approval. If the DTI is too high, you will not be able to get approved. Knowing what debts can be included or excluded from this DTI can be the key to knowing how your mortgage application will be structured. Revolving debts (credit cards, lines of credit, etc) can never be excluded as they have no set term or repayment period. Installment debts can be excluded if they do not have that much longer until they are paid in full. Ten months is the cut off period.

Installment debts with Less than 10 Payments Left

Installment debts with less than ten payment left can be excluded from your DTI as long as the excluded payment is 5% or less of your gross monthly income.

Example 1:

Your gross monthly income: $6500

Your monthly car payment with 9 payments left: $300

Proposed excluded payment percentage of income: 4.6%

Can this payment be excluded? Yes

Example 2:

Your gross monthly income: $6500

Your monthly car payment with 9 payments left: $500

Proposed excluded payment percentage of income: 7.6%

Can this payment be excluded? No

Question… I have a $400 per month installment loan with 13 payments left, if I pay down the balance below $4000, can we exclude this debt?

No

The FHA does not allow the balance to be paid down for the sake of excluding the payment. You would have to either wait a few more months or try to qualify in a different way.

Question… I have just a few months left on a car lease. I can exclude the car lease payment from my DTI. right?

No

A lease is not an installment loan. It is a rent payment.