Did you know that there are differences between conventional and FHA loans when it comes to omitting installment debt from the borrower’s debt-to-income ratio?
When it comes to conventional loans backed by Fannie Mae and Freddie Mac, borrowers can omit installment debt such as auto loans if they are 10 payments or less away from being paid off. However, with FHA loans, the requirements are a bit stricter. In addition to the installment debt being 10 payments or less away from being paid off, the monthly payment must also be no more than 5% of the borrower’s monthly income in order to be omitted from the debt-to-income ratio. If the payment exceeds 5% of the borrower’s monthly income, it must be included in the DTI ratios.
It’s important to note that neither agency allows borrowers to simply pay down the installment debt to 10 payments in order to qualify for the omission. Both requirements must be met in order for the installment debt to be excluded from the DTI ratios.
By understanding these differences between conventional and FHA loans, we can help borrowers navigate their options and find the best solution for their unique financial situation.
At MortgageDepot, we pride ourselves on working with both conventional and FHA lenders to provide borrowers with the options they are looking for, contact our office and we’ll connect you with a loan consultant who can give you your options.
