What Counts as Monthly Debt
When you apply for a mortgage, your lender calculates your debt-to-income ratio by dividing your total monthly debt payments by your gross monthly income. Fannie Mae has specific rules about which debts must be included in this calculation.
The basic rule is simple: any debt with more than 10 monthly payments remaining counts toward your ratio. This includes car loans, personal loans, credit cards, student loans, and minimum payments on lines of credit.
Say you have a car loan with 18 months left at $350 per month, two credit cards with minimum payments of $75 and $125, and a student loan at $200 per month. Your lender adds these up to get $750 in monthly debt obligations.
Some debts work differently. Lease payments always count, regardless of how many months remain. The reasoning is that when your car lease expires, you'll likely get another lease or buy a car, creating a new monthly payment.
How Credit Card Payments Are Calculated
Credit cards and revolving lines of credit require special attention. Your lender will use the minimum payment shown on your credit report. If no payment amount appears, or if it shows zero, the lender must use 5% of the outstanding balance.
This 5% rule can surprise borrowers. If you have a $10,000 credit card balance but your credit report shows a $0 minimum payment, your lender will count $500 per month toward your debt ratio.
For automated underwriting through Fannie Mae's Desktop Underwriter system, the calculation uses the greater of $10 or 5% of the balance. So even a small $150 credit card balance would count as $10 per month, not $7.50.
Student Loan Payment Rules
Student loans follow their own set of rules. If your credit report shows a monthly payment amount, your lender uses that figure. If the payment shows as $0 or blank, the lender has options depending on your situation.
For loans in deferment or forbearance, lenders typically calculate 1% of the outstanding balance as your monthly payment. A $30,000 student loan balance would count as $300 per month, even if you're not currently making payments.
If you're on an income-driven repayment plan with a documented $0 payment, your lender can verify this with your loan servicer and count the payment as $0. You'll need current documentation from your loan servicer showing your approved payment amount.
When Debts Paid by Others Don't Count
Sometimes other people make payments on debts that appear in your name. Your ex-spouse might pay the car loan from your marriage, or your parents might handle your student loan payments. These debts can be excluded from your ratio under specific conditions.
The person making payments must provide 12 months of canceled checks or bank statements proving they've made every payment on time. No late payments are allowed during this 12-month period.
For mortgage debts, the rules are stricter. The other person must be legally obligated on the loan, not just making payments voluntarily. You also cannot use rental income from that property to qualify for your new mortgage.
This exclusion doesn't apply if the person making payments has a financial interest in your new home purchase, such as the seller or your real estate agent.
Alimony and Child Support Obligations
Court-ordered alimony, child support, or separate maintenance payments count as monthly debt if they continue for more than 10 months. Voluntary payments don't count, but legally required payments do.
Your lender needs a copy of your divorce decree, separation agreement, or court order showing the payment amount and duration. The documentation must clearly state how long the payments will continue.
For alimony and separate maintenance, lenders have a choice. They can either include the payment as a monthly debt or subtract it from your qualifying income. Both approaches affect your debt-to-income ratio, but the math might work better one way or the other depending on your situation.
Business Debts in Your Personal Name
Self-employed borrowers often have business loans that appear on their personal credit reports. These debts can be excluded from your personal debt-to-income ratio if your business actually makes the payments and your lender can verify this.
You'll need 12 months of canceled business checks or bank statements showing the payments came from company funds. The debt must have no history of late payments, and your business tax returns must show the interest expense from this loan.
If your business financial statements don't reflect the loan payments as expenses, the lender will count the debt against your personal ratio. The same applies if you can't provide adequate proof that business funds make the payments.
Required Documentation
Different debt types require specific documentation. For most installment loans, your credit report provides sufficient information. For student loans with unclear payment amounts, you'll need current statements from your loan servicer.
When excluding debts paid by others, gather 12 months of canceled checks or bank statements from the person making payments. These documents must show consistent, on-time payments with no gaps.
For business debts, collect 12 months of business bank statements or canceled checks, plus your business tax returns showing the related interest expense. Court-ordered support payments require your divorce decree or separation agreement.
Common Complications
Several situations can complicate debt calculations. If your credit report shows accounts that don't belong to you, you can dispute them, but you'll need documentation proving they're not your responsibility. This often happens with family members who have similar names.
Deferred installment debts other than student loans must be included at their future payment amount, not their current $0 payment. If your credit report doesn't show the future payment, you'll need documentation from the lender.
Home equity lines of credit only count if they require a monthly payment. If the HELOC allows interest-only payments or no required payment, it may not affect your debt ratio, but this depends on the specific terms.
Timeshares always count as installment debt, even if they appear as mortgage loans on your credit report. The payment continues throughout the loan term and must be included in your calculations.
Why These Rules Exist
Fannie Mae's debt calculation rules aim to predict your ability to handle mortgage payments alongside your existing obligations. The 10-month cutoff recognizes that short-term debts won't significantly impact your long-term housing affordability.
The 5% rule for credit cards reflects the reality that minimum payments can change. Even if your current minimum payment is lower, credit card companies can increase it, and 5% provides a reasonable estimate of what you might actually pay.
The student loan rules acknowledge that deferred payments will eventually resume. Using 1% of the balance gives lenders a conservative estimate of your future payment obligation, protecting both you and the lender from payment shock when deferment ends.
References
For the official guidelines, see B3-6-05: Monthly Debt Obligations in the Fannie Mae Selling Guide.
Mortgage guidelines change. Stay current.
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Original Fannie Mae Guideline Text
B3-6-05, Monthly Debt Obligations (05/04/2022)
Alimony, Child Support, and Separate Maintenance Payments
Deferred Installment Debt
Federal Income Tax Installment Agreements
Open 30–Day Charge Accounts
Other Real Estate Owned—Qualifying Impact
Student Loans
Alimony, Child Support, and Separate Maintenance Payments
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 / Swing Loans
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.
Business Debt in Borrower’s Name
When a self-employed borrower claims that a monthly obligation that appears on their 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.
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.
Debts Paid by Others
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 real estate agent). Non-mortgage debts include installment loans, student loans, revolving accounts, lease payments, alimony, child support, and separate maintenance. See below for treatment of payments due under a federal income tax installment agreement.
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' canceled 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
.
Non-Applicant Accounts
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 for 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.
Deferred Installment Debt
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.
For information about deferred student loans, see Student Loans below.
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
.
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 above. 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
Garnishments
All garnishments with more than ten months remaining must be included in the borrower’s recurring monthly debt obligations for qualifying purposes.
Home Equity Lines of Credit
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.
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 their credit obligations. See below for treatment of payments due under a federal income tax installment agreement.
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
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.
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
for rental payment history requirements when using non-traditional credit.
Loans Secured by Financial Assets
When a borrower uses their financial assets—life insurance policies, 401(k) accounts, individual retirement accounts, certificates of deposit, stocks, bonds, etc.—as security for a loan, the borrower has a contingent liability.
The lender is not required to include this contingent liability as part of the borrower’s recurring monthly debt obligations provided the lender obtains a copy of the applicable loan instrument that shows the borrower’s financial asset as collateral for the loan. If the borrower intends to use the same asset to satisfy financial reserve requirements, the lender must reduce the value of the asset (the account balance, in most cases) by the proceeds from the secured loan and any related fees to determine whether the borrower has sufficient reserves.
Note: Payment on any debt secured by virtual currency is an exception to the above policy and must be included when calculating the debt-to-income ratio.
Open 30–Day Charge Accounts
Open 30–day charge accounts require the balance to be paid in full every month. Fannie Mae does not require open 30–day charge accounts to be included in the debt-to-income ratio.
See
, for additional information on open 30–day charge accounts.
Other Real Estate Owned—Qualifying Impact
For details regarding the qualifying impact of other real estate owned, see
.
Revolving Charge/Lines 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.
Student Loans
If a monthly student loan payment is provided on the credit report, the lender may use that amount for qualifying purposes. If the credit report does not reflect the correct monthly payment, the lender may use the monthly payment that is on the student loan documentation (the most recent student loan statement) to qualify the borrower.
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 determine the qualifying monthly payment using one of the options below.
If the borrower is on an income-driven payment plan, the lender may obtain student loan documentation to verify the actual monthly payment is $0. The lender may then qualify the borrower with a $0 payment.
For deferred loans or loans in forbearance, the lender may calculate
a payment equal to 1% of the outstanding student loan balance (even if this amount is lower than the actual fully amortizing payment), or
a fully amortizing payment using the documented loan repayment terms.
SEL-2020-01 SEL-2019-08
