HB-1-3555

(03-09-16) SPECIAL PN 11-1

Revised (01-05-24) PN 602

CHAPTER 11: RATIO ANALYSIS

11.1 INTRODUCTION

Ratio calculations are used to determine if the applicants’ repayment income can 

reasonably be expected to meet the anticipated monthly housing expense and total 

monthly obligations involved in homeownership. The Agency has established standards 

for principal, interest, taxes, and insurance (PITI) and total debt (TD) ratios; however, 

there is flexibility to apply these standards when valid compensating factors are present.

11.2 THE RATIOS

Ratios are calculated by utilizing the repayment income, as determined by the lender 

in Chapter 9 Section 2 of this Handbook. To qualify for a guarantee, borrowers must 

meet the Agency’s standards for both the PITI and TD ratios.

A. The PITI Ratio

Applicants are considered to have repayment ability if their proposed monthly 

housing expense does not exceed 29 percent of their repayment income. Monthly 

housing expenses include:

• First Mortgage (P&I);

• Subordinate Lien(s);

• Homeowner’s Insurance;

• Supplemental Property Insurance;

• Property Taxes;

• Mortgage Insurance (First Year annual fee monthly amount) Association/Project 

Dues (Condo, Co-Op, PUD);

• Other.

B. The Total Debt Ratio

Applicants are considered to have repayment ability when their total debts do not 

exceed 41 percent of their repayment income.

The total debt ratio includes monthly housing expense (PITI) plus other monthly 

credit or debt obligations incurred by the applicants. 
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Paragraph 11.2 The Ratios

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The lender must document the applicants’ debts through various records including,

but not limited to, credit reports, direct or third-party verifications, court documents, and

verification of deposits. All open debts/accounts (including non-medical collection 

accounts and judgments) incurred through the closing date must be considered in the total 

debt calculation and documented in GUS as well as the loan application, as applicable. 

Amounts listed on the credit report will be used unless verification supports an alternate 

payment amount. If an amount other than that shown on the credit report is used, the 

lender will provide documentation of the amount utilized. This documentation will be 

uploaded with the final submission to Agency. 

The following obligation expenses must be included in the monthly debts: 

1. PITI

• First Mortgage (P&I), property taxes, homeowners insurance, mortgage 

insurance (first year annual fee monthly amount), association/project dues, 

other. 

2. Installment accounts

• Accounts that will be paid in full through a specified number of fixed 

payments such as auto, personal, secured/unsecured, etc. must have the 

monthly payment included.

• If ten or less months of repayment remains per the credit report, creditor

verification, etc., the monthly debt may be omitted if the payment does not 

exceed five percent of the monthly repayment income.

• Installment debt may be paid down to ten months or less of remaining debt.

3. Revolving accounts 

• Credit cards, lines of credit, secured/unsecured, etc. must include the 

minimum monthly payment documented on the credit report or other creditor 

verification in the total debts.

• If the credit report shows an outstanding balance, but no minimum monthly 

payment, the payment must be calculated as five percent of the balance 

reported on the credit report.

• The lender may obtain a current account statement or creditor verification to 

document the actual monthly payment and include that amount in the monthly 

debts.
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Paragraph 11.2 The Ratios

(03-09-16) SPECIAL PN 11-3

Revised (01-05-24) PN 602

• Revolving accounts with no outstanding balance on the credit report do not 

require an estimated payment to be included in the debt ratio. 

• Revolving accounts with no outstanding balance are not required to be closed.

4. Open 30-Day Accounts

• A 30-day account is a credit arrangement requiring the applicant to pay off the 

full outstanding balance on the account every month.

• The lender may utilize the credit report to document the applicant has paid the 

outstanding balance for the previous 12 months. 

• If the credit report reflects late payments in the last 12 months, the lender 

must include five percent of the outstanding balance in the monthly debts.

• 30-day accounts that are paid monthly in full are not included in the total debt 

ratio.

5. Court Ordered Debts: Child support, alimony, garnishments, etc.

• Court ordered debts must have the payment included in the total debt ratio

unless the applicant has a release of liability from the court/creditor and 

acceptable evidence is documented.

• Lenders will utilize select pages from the applicable agreement/court order to 

document the required monthly payment due and the duration of the debt.

• Court ordered debts with ten or less payments remaining may be excluded if 

the payment does not exceed five percent of the monthly repayment income.

• For GUS transactions, the lender will manually enter the obligation(s) as a 

monthly liability. When the obligation account is entered as “other,” the 

lender will specify what the obligation is (i.e. court ordered child support.) A 

manual entry of this monthly obligation does not require an underwriting 

recommendation of “Accept” to be downgraded to a “Refer.”

• Lenders must confirm repayment agreements are current. Refer to Chapter 10 

for court ordered debt guidance and program eligibility.
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Paragraph 11.2 The Ratios

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6. Child Care Expenses

• Child care expenses are not required to be included in the monthly debt ratio. 

7. Student loans

• For outstanding student loans, regardless of the payment status, lenders must 

use:

o The payment amount reported on the credit report or the actual 

documented payment, when the payment amount is above zero; or

o One half (.50) percent of the outstanding loan balance documented on the 

credit report or creditor verification, when the payment amount is zero.

• Student loans in the applicant’s name alone but paid by another party remain 

the legal responsibility of the applicant. The applicable payment must be 

included in the monthly debts. 

• Student loans in a “forgiveness” plan/program remain the legal responsibility 

of the applicant until they are released of liability from the creditor. The 

applicable payment must be included in the monthly debts.

8. Mortgages: Rental Property

• A GUS Accept recommendation will not require a manual downgrade to a 

Refer when the net monthly rental income is negative.

• Income received from rents may only be counted for repayment if received for 

24 months or more. Rental income received for less than 24 months should 

not be entered into GUS as rental income.

• If the credit report reflects late mortgage payments on the rental dwelling in 

the 12 months prior to loan application, the full mortgage liability and all 

associated costs must be included in the monthly debts. 

• Refer to Chapter 9 for rental income guidance.

9. Mortgages: No Release of Liability

• Mortgage liabilities disposed of through a sale, trade, or transfer without a 

release of liability (i.e., borrower remains on the promissory note) must be 

included in the total debt ratio unless evidence can be obtained to confirm the 
HB-1-3555

Paragraph 11.2 The Ratios

(03-09-16) SPECIAL PN 11-5

Revised (01-05-24) PN 602

remaining party/new owner has successfully made the payment for the 

previous 12 months prior to loan application.

• Evidence may be reported through the credit report or verification from the 

creditor/servicer to document the payment history has been current for the 12 

months prior to loan application.

• If there are late payments in the previous 12 months prior to loan application, 

the full mortgage obligation must be included in the monthly debt.

10. Mortgages: Divorce 

• In the case of a divorce, the lender must obtain a copy of the legal separation 

agreement or divorce decree to document the remaining party/new owner 

responsible to pay all mortgage debts from the effective date of the decree 

forward.

• To exclude the mortgage debt, the lender must document the previous 12 

months have been paid as agreed prior to loan application through the credit 

report or verification from the creditor/servicer.

• If there are late payments in the previous 12 months prior to loan application, 

the full mortgage obligation must be included in the monthly debts.

11. Co-signed obligations 

• Co-signed debts refer to debts where the applicant may be a co-borrower, joint 

obligor, co-signer, guarantor, etc.

• Co-signed debts must be included in the monthly debts unless the applicants

provide evidence another obligor (party to the debt) has successfully made the 

payment for the previous 12 months prior to loan application. 

• Acceptable evidence includes, but is not limited to, canceled checks, money 

order receipts, and/or bank statements of the co-obligor. 

• Late payments reported in the previous 12 months prior to application will 

require the monthly liability to be included in the monthly debts. 

• If the applicant can provide conclusive evidence from the creditor that they 

will not pursue debt collection against the applicant should the other party 

default, the 12-month payment history of the additional party is not required. 
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Paragraph 11.2 The Ratios

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• Debts identified as “individual” on a credit report must be included in the debt 

ratio regardless of who is making the monthly payment (e.g. parents paying 

car payments on behalf of applicant and the loan is solely in the applicant’s 

name).

12. Business debts 

• Business debts (e.g. car loan) reported on the applicants’ personal credit report 

may be omitted from the monthly debt if there is evidence the debt is paid 

through a business account. 

• Acceptable evidence includes canceled checks or bank statements from a 

business account for the previous 12 months. 

13. 401(k) loans/personal asset loans 

• Loans pledging personal assets, such as a 401(k) account, retirement funds, 

savings account or other liquid assets do not require a payment to be included 

in the monthly debts. 

14. Debts of a non-purchasing spouse (NPS) 

• Applicants who currently reside or are purchasing in a community property 

state must include the debts of the NPS unless specifically excluded by state 

law. 

• Approved lenders are responsible to confirm state laws are met. 

15. Collection accounts 

• Refer to Chapter 10 for collection account guidance. 

16. Judgment accounts 

• Refer to Chapter 10 for Federal and non-Federal judgment guidance. 

17. Charge-off accounts 

• Charge-off accounts are not required to have a payment included in the 

monthly debts. Refer to Chapter 10 for charge-off account guidance. 
HB-1-3555

Paragraph 11.2 The Ratios

(03-09-16) SPECIAL PN 11-7

Revised (01-05-24) PN 602

18. Expense allowances (including Automobile Allowances) 

• An automobile or other expense allowance will not cancel out a monthly debt for 

an automobile or expense loan/debt. 

• The full amount of the monthly debt associated with the expense (such as a car or 

equipment payment) must be included in the total debt ratio calculation. 

• For guidance on calculating income for expense allowances, refer to Chapter 9. 

19. Balloon/deferred payments. 

• Deferred debts and balloon debts that will require payment in full upon their 

due date must have a payment included in the monthly debts. When the 

balloon/deferred payment loan is due within 12 months, the lender must 

evaluate the complete loan application to make a determination regarding the 

applicants’ repayment ability. 

• If the actual payment on a deferred/balloon loan is unknown, the lender may 

obtain documentation from the creditor to establish a monthly payment that 

will be due on a documented payment date, or they must use five percent of 

the outstanding balance on the credit report or creditor verification. 

20. Tax repayment agreements 

• Include Federal or State income tax repayment plan payments in the monthly 

debt. 

• If ten or less months of repayment remains per the plan, the monthly debt may 

be excluded if the payment does not exceed five percent of the monthly 

repayment income. 

• Refer to Chapter 10 for Federal Income Tax agreement eligibility. 

21. Lease payments 

• Auto, solar, energy, and additional lease payments must have the payment 

included in the monthly debt regardless of months remaining to pay on the 

contract. 
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Paragraph 11.2 The Ratios

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22. Debt management plans

• Include the monthly payment amount due from the counseling plan.

• Refer to Chapter 10 for guidance on credit exception and documentation 

requirements.

11.3 DEBT RATIO WAIVERS AND COMPENSATING FACTORS

The applicants’ PITI ratio may exceed 29 percent and the Total Debt ratio may 

exceed 41 percent if the lender determines that strong compensating factors demonstrate 

that the household has higher repayment ability.

A. Purchase Transactions: Debt ratio waivers

1. GUS Accept loans: 

GUS files that receive an Accept or Accept Full Documentation underwriting 

recommendation do not require debt ratio waivers. 

2. GUS Refer, Refer with Caution, and manually underwritten loans without GUS 

assistance:

The lender must document eligible compensating factors to support a debt 

ratio waiver. Agency approval of a lender’s request for debt ratio waiver may be 

granted if all of the following conditions are met:

• Acceptable ratio thresholds are met: 

o The maximum PITI ratio cannot exceed 32 percent, and

o The maximum TD ratio cannot exceed 44 percent;

• The credit score of all applicants is 680 or greater;

• At least one of the acceptable compensating factors listed below is 

identified. Supporting documentation is provided to the Agency and 

maintained in the lender’s permanent file. Acceptable Compensating 

Factors and Supporting Documentation:

o Accumulated savings or cash reserves available post loan closing are 

equal to or greater than three months of PITI payments. 

Documentation may include a verification of deposit (VOD) or bank 
HB-1-3555

Paragraph 11.3 Debt Ratio Waivers and Compensating Factors

(03-09-16) SPECIAL PN 11-9

Revised (01-05-24) PN 602

statements that meet the requirements of Chapter 9. Cash on hand is

not eligible for consideration as a compensating factor.

o The applicant(s) (all employed applicants) has been continuously 

employed with their current primary employer for a minimum of two

years. A Request for Verification of Employment (VOE) (Form RD 

1910-5, comparable HUD, FHA, VA or Fannie Mae form, or other 

equivalent), or a VOE prepared by an employment verification service 

(e.g., The Work Number.) must be provided. Applicants that have 

received Social Security benefits or retirement income for two years 

may utilize this compensating factor with documentation to support 

the history of receipt of benefits. This compensating factor is not 

applicable for self-employed applicants.

• Debt Ratio Waiver Request and Agency Approval:

o Debt ratio waivers must be requested and documented by the approved 

lender. The lender requests Agency concurrence with the debt ratio 

waiver by submitting a signed underwriting analysis that cites one or 

more of the above acceptable compensating factors. Lenders may 

utilize Fannie Mae 1008 / Freddie Mac 1077, Uniform Underwriting 

and Transmittal Summary, or similar form. Evidence of the 

compensating factor, such as a VOR, VOD, and/or VOE, must be 

submitted to the Agency for approval.

o The issuance of the Conditional Commitment for a Loan Note 

Guarantee represents Agency approval of the ratio waiver.

B. Refinance Transactions: Debt ratio waivers 

1. GUS Accept loans: 

• GUS files that receive an Accept or Accept Full Documentation 

underwriting recommendation do not require debt ratio waivers.

2. GUS Refer, Refer with Caution, and manually underwritten loans without GUS 

assistance:

• GUS files that receive a GUS recommendation of Refer, Refer with 

Caution, or are not supported by GUS require debt ratio waivers, and 

supporting documentation must be submitted to the Agency.
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Paragraph 11.3 Debt Ratio Waivers and Compensating Factors

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• Streamlined-assist refinance loans do not require debt ratio calculations, 

and therefore no debt ratio waiver.

Debt ratios for refinance loans are not limited to the maximum purchase 

debt ratio thresholds. 

• The following are examples of acceptable compensating factors for debt 

ratio waiver requests:

o Credit score of 680 or higher for all applicants. 

o Accumulated savings or cash reserves available post-closing are equal 

to or greater than three months of the proposed PITI payment. Cash 

on hand is not eligible for consideration as a compensating factor. 

o Continuous employment with the current primary employer.

o The issuance of the Conditional Commitment for a Loan Note 

Guarantee represents Agency approval of the ratio waiver.

11.4 MORTGAGE CREDIT CERTIFICATES

Authorized State or local housing finance agencies may issue a mortgage credit 

certificate (MCC) that provides a federal income tax credit to a qualified first-time 

homebuyer and/or low- or moderate-income homebuyer. Refer to Chapter 9 for MCC 

guidance and GUS data entry. 

11.5 FUNDED BUYDOWN ACCOUNTS

Funded buydown accounts are designed to reduce the borrower’s monthly payment 

during the initial years (temporary buydown) or the full life (permanent buydown) of the 

loan. Permanent buydowns are fully funded and paid for at loan closing. The interest 

rate is fixed and will not change for the life of the loan. Temporary buydowns are 

eligible when the applicable guidelines are met. 

• Temporary buydown account requirements:

o The mortgage loan must be underwritten at the full note rate. Both the full 

note rate and the initial buydown rate must be entered into GUS.

o Buydown funds may come from the seller, lender or other third party;

o Buydown funds may not come from the borrower;
HB-1-3555

Paragraph 11.5 Funded Buydown Accounts

(03-09-16) SPECIAL PN 11-11

Revised (01-05-24) PN 602

o The buydown must not reduce the interest rate more than two percent below 

the full note rate;

o The assistance may increase no more than one percent annually;

o The borrower must agree in writing that the temporary buydown funds will be 

placed in an escrow with a financial institution supervised by a federal or state 

agency and paid directly to the lender each month to reduce the monthly 

mortgage payment;

o The buydown account must be fully funded at origination; and

o A copy of the executed escrow agreement must be retained in the lender’s 

permanent loan file.

11.6 SECTION 8 HOMEOWNERSHIP VOUCHERS

Section 8 Homeownership Vouchers may be used for qualifying applicants. Refer to 

Chapter 9 for voucher guidance and GUS data entry. 

11.7 OBLIGATIONS NOT INCLUDED IN DEBT-TO-INCOME RATIOS

Obligations not considered or included in total debt-to-income ratio calculations 

include:

• Medical collections;

• Medical payments;

• Federal, state, and local taxes, unless a payment plan is in place;

• Federal Insurance Contribution Act (FICA) contributions;

• Other retirement contributions such as 401(k) accounts, including the repayment 

of loans secured by 401(k) funds;

• Automatic deductions to savings accounts, mutual funds, stocks, bonds, 

certificates of deposit, including the repayment of loans secured by such funds;

• Collateralized loans secured by depository accounts;

• Utilities;

• Insurance, other than property insurance;
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Paragraph 11.7 Obligations Not Included in Debt-To-Income Ratios

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• Commuting costs;

• Union dues;

• Open accounts with zero balances;

• Child care; and

• Voluntary deductions.

All liabilities disclosed by the applicant should be listed in GUS. The lender may 

“omit” liabilities as permitted.