What Counts as a Liability
When you apply for a mortgage, your lender must count every debt that could affect your ability to make your monthly payment. This goes beyond just the obvious debts like credit cards and car loans.
Your current housing payment gets included whether you rent or own. If you own your current home, the lender counts your mortgage payment, property taxes, insurance, and HOA fees. If you rent, they count your monthly rent.
All revolving credit accounts count, even if you pay them off monthly. The lender uses the minimum payment shown on your credit report, not your typical payment amount. Store credit cards, department store cards, and business credit cards all get included.
Installment loans with more than 10 months of payments remaining count as liabilities. This includes car loans, student loans, personal loans, and furniture financing. If your car loan has 8 months left, it won't count. If it has 12 months left, it will.
Child support, alimony, and maintenance payments count as monthly obligations. Lease payments for cars, equipment, or other items also get included in your debt calculation.
What Documentation Lenders Need
Your credit report serves as the primary source for verifying most debts. But lenders must dig deeper when information is missing or unclear.
If a significant debt appears on your loan application but not on your credit report, the lender needs separate verification. This might be a bank statement showing loan payments, a lease agreement, or a letter from the creditor showing the balance and payment terms.
When your credit report shows a debt that you didn't list on your application, you need to explain why. Maybe you forgot about an old store card, or perhaps you thought a loan was paid off. The lender may require documentation to support your explanation.
For debts secured by cryptocurrency or virtual currency, lenders need extra documentation showing the terms and payment history. These newer types of secured debts require careful verification.
Why Fannie Mae Requires Complete Debt Analysis
Fannie Mae's liability rules exist to ensure lenders get a complete picture of your financial obligations. A borrower who looks qualified based on income alone might struggle to make payments when all debts are considered.
The 10-month rule for installment loans makes practical sense. Debts that will be paid off soon won't affect your long-term ability to make mortgage payments. But a car loan with two years remaining will compete with your mortgage payment every month.
The requirement to verify debts not on credit reports prevents borrowers from hiding obligations. Some debts, particularly family loans or business debts, might not appear on consumer credit reports but still represent real monthly obligations.
Common Problems and Complications
One frequent issue occurs when borrowers pay off debts between application and closing. You might pay off a credit card to improve your debt-to-income ratio, but if new debts appear, your lender must recalculate everything. This can delay closing or even cause loan denial.
Business credit cards create confusion for self-employed borrowers. Even if you use a business card only for business expenses, it typically appears on your personal credit report and counts as a personal liability.
Student loans in deferment or forbearance still count as liabilities. The lender uses either the payment shown on your credit report or calculates a payment based on the loan balance. You can't exclude student loans just because payments are temporarily suspended.
Authorized user accounts on credit cards can complicate the analysis. If you're an authorized user on someone else's account, you might be able to exclude that debt with proper documentation showing you're not responsible for payments.
What Doesn't Count as a Liability
Many items that come out of your paycheck don't count as liabilities for mortgage qualification purposes. Federal, state, and local taxes are not considered debts, even though they reduce your take-home pay.
Retirement contributions like 401(k) deferrals don't count as liabilities. This includes loan repayments from your 401(k) account. The lender views these as savings rather than debt obligations.
Union dues, commuting costs, and other voluntary payroll deductions also get excluded from the debt calculation. These items reduce your available income but aren't treated as competing debt obligations.
Health insurance premiums and other benefit deductions fall into this category too. While they affect your take-home pay, they don't count toward your debt-to-income ratio.
Timing and Recalculation Requirements
Your debt picture can change between loan application and closing. Fannie Mae requires lenders to recalculate your debt-to-income ratio if new liabilities surface during this period.
Say you apply for a mortgage in January and get approved. In March, just before closing, your lender discovers you took out a car loan in February. They must recalculate your debt-to-income ratio with the new car payment included.
This recalculation requirement continues right up to closing day. If you sign a lease agreement or take on any new debt obligation after your loan approval, the lender must factor it into your qualification.
The rule protects both you and the lender. It prevents you from taking on debt that could make your mortgage payment unaffordable, and it protects the lender from approving loans based on incomplete information.
References
For the official guidelines, see B3-6-01: General Information on Liabilities in the Fannie Mae Selling Guide.
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Original Fannie Mae Guideline Text
B3-6-01, General Information on Liabilities (05/04/2022)
General Information on Liabilities
The lender’s risk analysis must include all liabilities affecting income or assets that will affect the borrower’s ability to fulfill the mortgage payment obligation.
A borrower’s liabilities include the following:
housing payment (mortgage or rent) for each borrower’s principal residence,
all revolving charge accounts,
installment loan debts with a remaining payment term greater than 10 months,
installment debts secured by virtual currency,
lease payments,
real estate loans,
HELOCs,
alimony and child support,
maintenance payments, and
all other debts of a recurring nature.
For each liability, the lender must determine the unpaid balance, the terms of repayment, and the borrower’s payment history, and verify any other liability that is not shown on a credit report by obtaining documentation from the borrower or creditor.
If the credit report does not contain a reference for each significant open debt shown on the loan application—including outstanding mortgage debt, bank, student, or credit union loans—the lender must provide separate credit verification.
If a current liability appears on the credit report that is not shown on the loan application, the borrower should provide a reasonable explanation for the undisclosed debt. Documentation may be required to support the borrower’s explanation.
If the borrower discloses, or the lender discovers, additional liabilities after the underwriting decision has been made, up to and concurrent with closing, the lender must recalculate the borrower's debt-to-income ratio.
See B3-6-02, Debt-to-Income Ratios and B3-6-03, Monthly Housing Expense for the Subject Property for additional information.
Monthly Obligations Not Included in Liabilities
Some obligations, often identified on a borrower’s paystub, are not considered a liability and will not be included as a debt or deducted from the borrower’s gross income when calculating the borrower’s debt-to-income ratio. These obligations include items such as
federal, state, and local taxes;
Federal Insurance Contributions Act (FICA) or other retirement contributions, such as 401(k) accounts (including repayment of debt secured by these funds);
commuting costs;
union dues; and
voluntary deductions.
