A borrower’s ability to repay a loan is determined by the borrower’s monthly debt payments and the new house payment compared to their calculated monthly income.
“Monthly Debt Payments” + “New House Payment” vs. “Calculated Monthy Income” = Debt To Income Ratio (DTI)
Every mortgage loan requires this debt to income calculation. USDA home loans are no exception. Borrowers typically want to know what is considered the maximum debt to income ratio for a USDA loan (referred to as “USDA DTI” for short.)
It is Possible for USDA Debt to Income Ratio to Exceed 41% and Have Approved Around 46%.
USDA Housing & Total Debt to Income Ratios
When it comes to USDA qualification, there are two debt to income ratios to consider. The first is called the housing ratio or front ratio. The USDA housing ratio compares the new mortgage payment including escrows with the gross monthly income. Generally, 29% should be the USDA buyer’s goal. Next, is the total debt ratio which includes all monthly payments compared to the gross monthly income. 41% is the general rule for USDA total debt to income ratio, but as we explain later, there are exceptions to exceed these limits with an income waiver or USDA automated approval. Combining the housing and total ratios are usually shown as 29/41%.
New Total Housing Payment/Total Monthly Income = USDA Housing DTI
Total Monthly Payments/Total Monthly Income = USDA Total DTI
What is Included in the USDA Debt to Income Ratio?
We mentioned total debts earlier, but what is included in “total debts?” Here is a detailed list from the USDA Rural Development guidelines:
- New housing payment including escrows
- HOA dues
- Installment loan payments
- Revolving payments (credit cards, lines of credit, charge cards)
- Child support or alimony
- Payroll garnishments
- Student loan payments – Payment types vary (see below)
- Mortgage payment on other retained property
- IRS payment plans
- Judgment payment plans
- Rental loss
- Auto allowance or expense account payments – the amount of payment exceeding the reimbursement
- Non-medical collections with collective balances of $2,000 or more – use 5% of the balances for a payment or if payment arrangement in place, use that and document history.
USDA Student Loan Payment Guidelines
Out of the monthly payments above, a prevalent situation deals with USDA student loan payment requirements. Unlike Fannie Mae and Freddie Mac loans which allow low, income-based repayment figures, USDA does not. USDA will not use any payments considered graduated, adjustable, or other repayment types not considered fixed. Therefore, student loans with these characteristics must be calculated at 1% of the balances. Although, fixed student loan payments may be used. Thus, assuming documentation is provided to prove the payment, interest rate, and repayment term are fixed. In reality, this guideline mirrors FHA student loan guidelines. If this guideline causes issues, let’s discuss low down payment HomeReady or Home Possible options.
USDA Debt to Income Ratio Exclusions
There are exceptions to the USDA DTI rules. One exception allows lenders to exclude obligations with ten months or less remaining on the term. Examples include all installment loans, alimony, child support, student loans, or other commitments. Other payment types which may be excluded from USDA debt to income ratios include:
- Childcare expenses
- Business debts paid directly by business
- 401k loans
- Co-signed obligations with required supporting documentation
- Debts of the non-purchasing spouse
- Charge-off accounts
- Medical collections
- Non-medical collections with a cumulative balance under $2,000
How to Exceed USDA Debt to Income Ratio 29/41% Requirements
For a lender to receive a USDA pre-approval, the loan must be submitted through USDA’s Guaranteed Underwriting System. It is otherwise known as GUS. Submission through GUS provides one of the following: Automated pre-approval, the requirement for a manual underwrite, or ineligible.
The standard 29/41% debt ratios we have discussed apply for manually underwritten USDA loans. So, if GUS responds with a “refer,” manual underwriting is required. Therefore, an underwriter decides to determine if the file meets USDA qualification. Additionally, manual underwriting requires more supporting documentation than an automated pre-approval. Basically, because of the higher risk, but if a buyer’s file needs a manual to underwrite, there is still a way to exceed the 29/41% DTI to possibly 32/44%.
USDA Debt to Income Ratio Waiver
For a manually underwritten loan debt to income ratio to exceed 29/41%, the lender must request a debt ratio waiver, but to receive a debt ratio waiver, ALL of the following conditions must be met:
Housing ratio is between 29 & 32%, and the total ratio is between 41 & 44% AND The credit score of all applicant(s) is 680 or greater AND At least one of the acceptable compensating factors is identified and supporting documentation is provided (see below for compensating factors).
USDA Compensating Factors
The third requirement to exceed manual underwriting debt ratio 29/41% ratios are to have one of these compensating factors.
- New housing payment is equal or less than prior verified housing expense
- Accumulated savings of three months of new house payments
- All applicant(s) continuously employed with current employer two years or more
How to Exceed Manual USDA Debt to Income Ratio Requirements
Did you catch that we said up to 46% earlier? We sure did! As mentioned, lenders must use the automated underwriting system up-front for pre-approval. If the file characteristics are strong enough, it is possible to receive an automated pre-approval with these ratios. Although, lenders may have their own limits of 43% or 45%, when we have received an automated approval through GUS above 45%, we have been able to close these.
What Improves a Buyer’s Chance of a USDA Automated Approval?
There are lots of other possible factors which could help chances of approval. Not only approval but an approval with a higher debt to income ratio. Any automated system or even an underwriter is weighing the benefits versus issues of a file. So, a buyer wants to have as many good or compensating factors as possible.
- Low debt to income ratio
- Time on job
- Low payment shock (new house payment compared to prior house payment)
- Higher credit score
- Established credit depth
Contact OVM Financial If:
- You are curious about a USDA no money down loan
- Been denied a USDA loan with another lender
- Are a lender that is not able to close manually underwritten USDA loans
- Need other loan solutions for buyers with student loan debt