Once the lender has reviewed the homebuyer’s income and liabilities, the lender can determine the borrower’s ability to pay. This section describes the criteria for this calculation under the Section 184 Program.
| a. | Debt to Income Ratio. A debt-to-income ratio is used to determine whether the borrower can reasonably be expected to meet the expenses involved in homeownership and provide for the family. While meeting other household obligations, a debt-to-income ratio of no more than 41 percent is generally required to qualify the borrowers. A debt-to-income ratio exceeding 41 percent may be acceptable if significant compensating factors are presented. |
The monthly debt payment includes:
| 1. | Principal and interest payments on the mortgage |
| 2. | Hazard insurance premiums |
| 4. | Leasehold taxes or payments |
| 5. | Homeowner or condominium association dues (as applicable) |
| 6. | Payments for any second mortgages |
| 7. | Payments on all recurring obligations and other liabilities |
| 8. | Aggregate negative rental income from investment properties |
| 9. | Monthly mortgage payments on any second home |
| b. | Compensating Factors. The following compensating factors may be used to justify approval of mortgage loans with ratios exceeding the guidelines. Lenders must explain any compensating factor used for loan approval. |
| 1. | The borrower has successfully demonstrated the ability to pay housing expenses equal to or greater than the proposed monthly housing expenses for the new mortgage. If the borrower over the past 12-24 months has met his or her housing obligations as well as other debts (of the same amount), there should be little reason to doubt the borrower’s ability to continue to do so despite having ratios in excess of those prescribed. |
| 2. | The borrower makes a large down payment (from their own funds) toward the purchase of the property (at least 10 percent). |
| 3. | Previous credit history shows that the borrower has the ability to devote a greater portion of income to housing expenses. |
| 4. | There is only a small increase (10 percent or less) in the borrower’s housing expense (PITI). |
| 5. | The borrower has substantial non-taxable income (if no adjustment made previously in the ratio computations). |
| 6. | The borrower has substantial cash reserves after closing (at least three months PITI). |
| 7. | High residual income is available for the payment of living expenses after estimated monthly housing expenses and other monthly housing obligations have been met. The formula for residual income is: |
Total Income x 80 percent minus PITI and Recurring Debts = Residual Income
Do not use utility or maintenance costs in this formula. Exhibit 5-1 provides an example of this calculation.
Exhibit 5-1: Calculating Residual Income
|
Total monthly income
|
$2,500
|
Eighty percent of income
|
$2,000
|
Less housing costs (PITI)
|
($800)
|
Less recurring debts
|
($200)
|
Total residual income
|
$1,000
|
| 8. | Other reasonable and documented compensating factors will be considered. |
