HELPING MORE BORROWERS QUALIFY!
Both Fannie Mae and Freddie Mac have updated their policy regarding contingent liabilities or debt paid by others. Previously, both Fannie Mae and Freddie Mac required that in order to exclude a borrower’s debt that is being paid by another party, the other party that was paying the debt had to also be responsible for the liability. However, that is no longer the case for non-mortgage debt for Fannie Mae and for both mortgage and non-mortgage debt for Freddie Mac.
For Fannie Mae, in Selling Guide Update 2017-04 they simplified their requirements for excluding non-mortgage debts from the debt-to-income ratio as follows:
Non-mortgage debts include debt such as installment loans, student loans, and other monthly debts as defined in the guide. If the lender obtains documentation that a non-mortgage debt has been satisfactorily paid by another party for the past 12 months, then the debt can be excluded from the debt-to-income ratio. This policy applies regardless of whether the other party is obligated on the debt. NOTE: This policy does not apply if the other party is an interested party to the subject transaction (such as the seller or realtor).
This means as long as the borrower can prove another (non-interested) party has been paying the debt on time for 12 months, it no longer has to be counted against the borrower’s ratios.
For mortgage debt, Fannie Mae allows the following: when a borrower is obligated on a mortgage debt – but is not the party who is actually repaying the debt – the lender may exclude the monthly mortgage payment from the calculation of the DTI ratio if the party making the payments is obligated on the mortgage debt and can document the most recent 12-month payment history with no delinquencies.
Freddie Mac went even further in Bulletin 2017-23, as they indicated they were making the following updates:
It has become more common for Borrowers to receive help from others in making payments on their debts (e.g., Borrower’s parents making their student loan payments). To account for this, we are updating our requirements to permit installment, revolving and lease payments to be excluded from the monthly DTI ratio when a party other than the Borrower has been making timely payments on the debt for the most recent 12 months and certain other requirements are met.
In addition, we are updating our requirements for excluding Mortgage debt from the monthly DTI ratio when a party other than the Borrower has been making timely payments for the most recent 12 months.
In all cases, we are no longer requiring that the Borrower be a cosigner or guarantor on the excluded debt.
So, this change allows both mortgage and non-mortgage debt to be excluded from a borrower’s ratio, as long the other party has been making timely payments for the most recent 12 months.
Although there is a difference in the changes between the two agencies, it is exciting to see these new policies which are designed to help borrowers qualify loans, in a “make sense” sort of way. PRMG’s product profiles have been updated to reflect these changes.