B3-6-02, Debt-to-Income Ratios (05/04/2022)

The DTI ratio consists of two components:

• total monthly obligations, which includes the qualifying payment for the subject mortgage loan and other long-term and significant short-term monthly debts (see Calculating Total Monthly Obligation below); and

• total monthly income of all borrowers, to the extent the income is used to qualify for the mortgage (see Chapter B3–3, Income Assessment).

For manually underwritten loans, Fannie Mae’s maximum total DTI ratio is 36% of the borrower’s stable monthly income. The maximum can be exceeded up to 45% if the borrower meets the credit score and reserve requirements reflected in the Eligibility Matrix.

For loan casefiles underwritten through DU, the maximum allowable DTI ratio is 50%.

See B3-1-01, Comprehensive Risk AssessmentB3-1-01, Comprehensive Risk Assessment for information about the DTI.

Fannie Mae makes exceptions to the maximum allowable DTI ratios for particular mortgage transactions, including:

• cash-out refinance transactions — the maximum ratio may be lower for loan casefiles underwritten through DU (see B2-1.3-03, Cash-Out Refinance TransactionsB2-1.3-03, Cash-Out Refinance Transactions);

• high LTV refinance transactions - except for loans underwritten under the Alternative Qualification Path, there are no maximum DTI ratio requirements (see B5-7-01, High LTV Refinance Loan and Borrower EligibilityB5-7-01, High LTV Refinance Loan and Borrower Eligibility);

• borrowers who do not have a credit score — the maximum ratio may be lower for manually underwritten loans and DU loan casefiles (see B3-5.4-01, Eligibility Requirements for Loans with Nontraditional CreditB3-5.4-01, Eligibility Requirements for Loans with Nontraditional Credit);

• non-occupant borrowers — the maximum ratio is lower than 45% for the occupying borrower for manually underwritten loans (see B2-2-04, Guarantors, Co-Signers, or Non-Occupant Borrowers on the Subject TransactionB2-2-04, Guarantors, Co-Signers, or Non-Occupant Borrowers on the Subject Transaction); and

• government mortgage loans — lenders must follow the requirements for the respective government agency.

The total monthly obligation is the sum of the following:

• the housing payment for each borrower’s principal residence

  • if the subject loan is the borrower’s principal residence, use the PITIA and qualifying payment amount (see B3-6-03, Monthly Housing Expense for the Subject PropertyB3-6-03, Monthly Housing Expense for the Subject Property);

  • if there is a non-occupant borrower, use the mortgage payment (including HOA fees and subordinate lien payments) or rental payments (see B3-6-05, Monthly Debt ObligationsB3-6-05, Monthly Debt Obligations);

  • if the subject loan is a second home or investment property, use the mortgage payment (including HOA fees and subordinate lien payments) or rental payments (see B3-6-05, Monthly Debt ObligationsB3-6-05, Monthly Debt Obligations;

• the qualifying payment amount if the subject loan is for a second home or investment property (see B3-6-04, Qualifying Payment RequirementsB3-6-04, Qualifying Payment Requirements);

• monthly payments on installment debts and other mortgage debts that extend beyond ten months;

• monthly payments on installment debts and other mortgage debts that extend ten months or less if the payments significantly affect the borrower’s ability to meet credit obligations;

• monthly payments on installment debts secured by virtual currency;

• monthly payments on revolving debts;

• monthly payments on lease agreements, regardless of the expiration date of the lease;

• monthly alimony, child support, or maintenance payments that extend beyond ten months (alimony (but not child support or maintenance) may instead be deducted from income, (see B3-6-05, Monthly Debt ObligationsB3-6-05, Monthly Debt Obligations);

• monthly payments for other recurring monthly obligations; and

• any net loss from a rental property.

Note: Fannie Mae acknowledges that lenders may sometimes apply a more conservative approach when qualifying borrowers. This is acceptable as long as Fannie Mae’s minimum requirements are met, and lenders consistently apply the same approach to similar loans. For example, a lender might calculate a higher minimum payment on a credit card account than what Fannie Mae requires, which is acceptable as long as the lender consistently applies this calculation to all mortgage applications with revolving debts.

Fannie Mae expects lenders to have in place processes to facilitate borrower disclosure of changes in financial circumstances throughout the origination process and prefunding quality control processes to increase the likelihood of discovering material undisclosed debts or reduced income. See D1-2-01, Lender Prefunding Quality Control Review ProcessD1-2-01, Lender Prefunding Quality Control Review Process.

As a result of the lender's normal processes and controls, the lender may need to re-underwrite the loan after initial underwriting. If the borrower discloses or the lender discovers additional debt(s) or reduced income after the underwriting decision was made up to and concurrent with loan closing, the loan must be re-underwritten if the new information causes the DTI ratio to increase by more than the allowed tolerances.

In all cases, if the lender determines that there is new subordinate financing on the subject property during the loan process, the mortgage loan must be re-underwritten.

Note: Re-underwriting means that loan casefiles must be resubmitted to DU with updated information; and for manually underwritten loans, a comprehensive risk and eligibility assessment must be performed.

The following steps are required if the borrower discloses or the lender discovers additional debt(s) or reduced income after the underwriting decision was made up to and concurrent with loan closing: