There are certain debts that show up on your credit that can be excluded from your Debt to Income ratio (DTI) when applying for a mortgage. Some debts, however, cannot be excluded and may affect your ability to qualify for a loan.
The most common debts borrowers try to omit (leave out) from their DTI are:
- Student loans with deferred payments
- Car loans that are paid by someone else
- Installment loans with less than 10 payments left
- Business loans paid by a self-employed business.
In order for any of these debts to even be considered for omission, certain stipulations apply.
Student loans must be deferred for 12 months after the funding of the mortgage for the underwriter to consider excluding those debts.
One exception is that Conventional guidelines do not permit the deferment of student loans. If you are applying for a Conventional mortgage, you will have to count the estimated payment into your DTI regardless of how long the loan will be deferred.
Government loans (FHA, VA, USDA) allow for the exclusion of student loans if it can be proven that they are deferred greater than 12 months after the funding of the mortgage.
Car loans must have 12 months cancelled checks to show that these debts were paid by someone else. If the car loan is less than 12 months old, it is not possible to omit this payment from the DTI.
Further, the loan applicant must be a co-signer on the car loan, and not the primary borrower. This means that the person paying for the car loan must also be on the car note as the primary borrower.
A car lease, however, can never be omitted from the DTI. When you turn a leased car into the car dealership, it is expected that you will lease or buy another car, incurring a debt that would be similar to your current car lease payment.
Conventional and Government guidelines allow for the exclusion of car loans paid by someone else if the above documentation is provided.
Most lenders still allow the omission of installment loans with less than 10 payments from the DTI. There are a few lenders who will not allow this now, so it is best not to count on it as a guarantee.
Conventional and Government guidelines both allow for the exclusion of these debts, but some lenders could have a credit overlay that is impossible to overcome.
Business loans are tricky to exclude, and are at the underwriter’s discretion.
When attempting to omit business loans, remember that it is always easier to prove that installment loans are paid by a business because these loan payments have a fixed amount.
Revolving debts have revolving payments, so it is extremely difficult to prove that a business has been paying for this account for 12 months.
Documentation that is necessary to prove that a loan is paid by a business includes, but is not limited to:
- 12 months cancelled checks from a business account
- Business account bank statements sourcing the funds may be required
- If the account reports on your credit report as being a business account, this could also help sway the underwriter into omitting accounts paid by your business. Or the original note showing that the account is a business debt could help the cause as well.