Kentucky USDA Rural Housing Changes for Below

USDA Advance Copy Notice HB-1-3555 Chapter 11

USDA has announced that Chapter 11 of the HB-1-3555 will be updated and an advanced copy has been provided.  Changes will become effective after USDA issues a Special Procedure Notice.

  • Clarification was added that revolving accounts with no outstanding balance are not required to be closed.
  • USDA eliminated guidelines provided that a retained property that has been rented for 24 months or longer may be omitted from the DTI, and
  • Added guidance that the income received from rents may only be included in the repayment calculation if the property has been rented for 24 mo. or more.
  • Guidelines were added that monthly payment for borrowers in debt management plans must be included in the DTI.
  • The calculation guidelines for Non-Fixed Student Loan Payments were updated removing the requirement for the greater of calculation to be used and added guidance for when the payment amount is zero.
  • Additional guidance was added that compensating factors supporting Debt Ratio Waivers for manually underwritten loans must be documented.
  • Clarification was added that federal, state and local taxes don’t need to be included in the DTI unless there is a payment plan in place.

Refer to the Advance Copy Notice HB-1-3555 Chapter 11 and Chapter 11: Ratio Analysis

What is a debt to income ratio for a Kentucky Mortgage?

A debt to income ratio, commonly referred to as DTI, is the ratio of the amount of monthly expenses you have relative to your gross (before tax) income.

The automated underwriter will look at two ratios when analyzing your DTI: your front end DTI ratio and your back end DTI ratio.

Front End DTI

The front end DTI is the ratio of your new housing payment including taxes and insurance relative to the amount of income you earn.  The front end DTI ratio excludes all other debts and simply analyzes your income relative to the payments on the new mortgage plus tax and insurance.

So, if your mortgage payments including tax and insurance are $1,000 and you earn $4,000 per month in gross income, your front end DTI would be 25% ($1,000 / $4,000 = 25%).

Generally, the automated underwriter likes to see front end DTI ratios below 40%, although it will approve higher front end DTI ratios with compensating factors like high credit scores, money in the bank, low loan to value ratio, etc.

Back End DTI

The back end DTI is the ratio of all of your expenses appearing on your credit report plus your new mortgage payment including taxes and insurance divided by your gross monthly income.  The back end DTI ratio does not include things like utilities, health insurance or groceries.  It is calculated using only the liabilities appearing on your credit report plus any child support or garnishments that may appear on your paystubs.

So, to continue our example from above, if your mortgage payments with tax and insurance are $1,000 per month, you have a $250 car payment, $250 in credit card payments and a gross income of $4,000, your back end DTI is 37.5% ($1,500 / $4,000 = 37.5%).

Generally the automated underwriter likes to see back end DTI ratios under 45%.  However, it will approve loans with a 55% back end DTI or higher if there are compensating factors.

It is important to understand what a debt to income ratio is, however, you do not have to calculate it yourself.  Your Loan Originator and your Processor will do this for you.