source:
  type: guide
  id: usda-hb-3555-11.1
  authority: USDA SFH Guaranteed Loan Program Technical Handbook HB-1-3555 ¶11.1 —
    Introduction
  description: USDA SFH Guaranteed Loan Program Technical Handbook HB-1-3555 ¶11.1
    — Introduction.
  coverage_tier: operative
obligations:
- id: usda-hb-3555-11.1-full
  canonical_id: usda-hb-3555-11.1-full
  section: USDA SFH Guaranteed Loan Program Technical Handbook HB-1-3555 ¶11.1 — Introduction
  type: do
  tags:
  - regulator-direct
  - usda
  - usda-handbook
  - corpus-expansion
  - tier-operative
  primary_source:
    tier: 1
    authority: USDA SFH Guaranteed Loan Program Technical Handbook HB-1-3555 ¶11.1
      — Introduction
    source_class: usda-handbook
    source_url: https://www.rd.usda.gov/sites/default/files/hb-1-3555_consolidated.pdf
    snapshot_id: 0466acd1ea2d17a4
    fetched_at: '2026-05-25T14:10:13Z'
    content_hash: sha256:22ac6f998ff72578e318fca138ebe80fb18ae2fc701eb5936172f1842679a13a
    paragraph_quote: '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 [7 CFR
      3555.151(H)(1)(I)] 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: x First Mortgage
      (P&I); x Subordinate Lien(s); x Homeowner’s Insurance; x Supplemental Property
      Insurance; x Property Taxes; x Mortgage Insurance (First year annual fee monthly
      amount); x Association/Project Dues (Condo, Co-Op, PUD); and x 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. HB-1-3555 (03-09-16)
      SPECIAL PN 11-2 Revised (05-05-25) PN 640 Guidance documents lack the force
      and effect of law, unless expressly authorized by statute or incorporated into
      a contract. USDA may not cite, use, or rely on any guidance that is not available
      through their guidance portal, except to establish historical facts. The total
      debt ratio includes monthly housing expense (PITI) plus other monthly credit
      or debt obligations incurred by the applicants. 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 and 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 the Agency.
      If an applicant pays off a debt in order to qualify, the lender must document
      the source of funds used to pay off the obligation in their permanent loan file.
      The following obligation expenses must be included in the monthly debts: 1.
      PITI x First Mortgage (P&I), property taxes, homeowner’s insurance, mortgage
      insurance (first year annual fee monthly amount), association/project dues,
      other. 2. Installment Accounts x 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. x If ten or less months of repayment
      remains on any individual account 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. x Installment debt may be paid down to ten
      months or less of remaining debt. 3. Revolving Accounts x Credit cards, lines
      of credit, secured/unsecured loans, etc. must include the minimum monthly payment
      documented on the credit report or other creditor verification in the total
      debts. HB-1-3555 (03-09-16) SPECIAL PN 11-3 Revised (05-05-25) PN 640 Guidance
      documents lack the force and effect of law, unless expressly authorized by statute
      or incorporated into a contract. USDA may not cite, use, or rely on any guidance
      that is not available through their guidance portal, except to establish historical
      facts. x 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. x 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. x Revolving accounts with no outstanding balance
      on the credit report do not require an estimated payment to be included in the
      debt ratio. x Revolving accounts with no outstanding balance are not required
      to be closed. 4. Open 30-Day Accounts x A 30-day account is a credit arrangement
      requiring the applicant to pay off the full outstanding balance on the account
      every month. x The lender may utilize the credit report to document the applicant
      has paid the outstanding balance for the most recent 12 months. x If the credit
      report reflects late payments in the most recent 12 months, the lender must
      include five percent of the outstanding balance in the monthly debts. x 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. x 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. x Lenders will utilize select pages from the applicable agreement/court
      order to document the required monthly payment due and the duration of the debt.
      x 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. x
      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
      HB-1-3555 (03-09-16) SPECIAL PN 11-4 Revised (05-05-25) PN 640 Guidance documents
      lack the force and effect of law, unless expressly authorized by statute or
      incorporated into a contract. USDA may not cite, use, or rely on any guidance
      that is not available through their guidance portal, except to establish historical
      facts. entry of this monthly obligation does not require an underwriting recommendation
      of Accept to be downgraded to a Refer x Lenders must confirm repayment agreements
      are current. Refer to Chapter 10 for court ordered debt guidance and program
      eligibility. 6. Child Care Expenses x Child care expenses are not required to
      be included in the monthly debt ratio. 7. Student Loans x 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. x 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. x 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. x Co-signed obligations are addressed below in section 11. 8.
      Mortgages: Rental Property x A GUS Accept recommendation will not require a
      manual downgrade to a Refer when the net monthly rental income is negative.
      x 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. x If the credit report reflects late mortgage
      payments on the rental dwelling in the most recent 12 months, the full mortgage
      liability and all associated costs must be included in the monthly debts. HB-1-3555
      (03-09-16) SPECIAL PN 11-5 Revised (05-05-25) PN 640 Guidance documents lack
      the force and effect of law, unless expressly authorized by statute or incorporated
      into a contract. USDA may not cite, use, or rely on any guidance that is not
      available through their guidance portal, except to establish historical facts.
      x Refer to Chapter 9 for rental income guidance. 9. Mortgages: No Release of
      Liability x Mortgage liabilities disposed of through a sale, trade, or transfer
      without a release of liability (i.e. the borrower remains on the promissory
      note) must be included in the total debt ratio unless evidence can be obtained
      to confirm the remaining legally obligated party has successfully made the payment
      for the most recent 12 months. x Evidence may be reported through the credit
      report or verification from the creditor/servicer to document the payment history
      has been current for the most recent 12 months. x If there are late payments
      in the most recent 12 months, the full mortgage obligation must be included
      in the monthly debt. 10. Mortgages: Divorce x In the case of a divorce, the
      lender must obtain a copy of the legal separation agreement or divorce decree
      to document the remaining legally obligated party is responsible to pay all
      mortgage debts from the effective date of the decree forward. x Mortgage debts
      assigned to another party by court order (such as through a divorce decree)
      can be excluded from consideration when there is evidence the other party is
      legally obligated to pay the debt. A copy of the court order which requires
      the other party to make the payments must be retained in the lender’s permanent
      loan file. x The applicant is limited to being party to one USDA funded or guaranteed
      loan. 11. Co-signed obligations x Co-signed debts refer to debts where the applicant
      may be a co-borrower, joint obligor, co-signer, guarantor, etc. x 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
      most recent 12 months. HB-1-3555 (03-09-16) SPECIAL PN 11-6 Revised (05-05-25)
      PN 640 Guidance documents lack the force and effect of law, unless expressly
      authorized by statute or incorporated into a contract. USDA may not cite, use,
      or rely on any guidance that is not available through their guidance portal,
      except to establish historical facts. x 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 most recent 12 months will
      require the monthly liability to be included in the monthly debts. x 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. x 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). x Debts
      assigned to another party by court order (such as through a divorce decree)
      can be excluded from consideration when there is evidence the other party is
      legally obligated to pay the debt. A copy of the court order which requires
      the other party to make the payments must be retained in the lender’s permanent
      loan file. 12. Business Debts x 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. x Acceptable evidence
      includes canceled checks or bank statements from a business account for the
      most recent 12 months. x Payments paid by the business must be included on the
      cash flow analysis and/or profit and loss statement, when applicable. 13. 401(k)
      Loans/Personal Asset Loans x 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) x 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. HB-1-3555 (03-09-16) SPECIAL PN 11-7 Revised (05-05-25) PN 640
      Guidance documents lack the force and effect of law, unless expressly authorized
      by statute or incorporated into a contract. USDA may not cite, use, or rely
      on any guidance that is not available through their guidance portal, except
      to establish historical facts. x Approved lenders are responsible to confirm
      state laws are met. 15. Collection Accounts x Refer to Chapter 10 for collection
      account guidance. 16. Judgment Accounts x Refer to Chapter 10 for Federal and
      non-Federal judgment guidance. 17. Charge-off Accounts x Refer to Chapter 10
      for charge-off account guidance. 18. Expense allowances (including automobile
      allowances) x An automobile or other expense allowance will not cancel out a
      monthly debt for an automobile or expense loan/debt. x 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. x For guidance on calculating
      income for expense allowances, refer to Chapter 9. 19. Balloon/Deferred Payments
      x 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. x 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 x 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. HB-1-3555 (03-09-16) SPECIAL PN 11-8
      Revised (05-05-25) PN 640 Guidance documents lack the force and effect of law,
      unless expressly authorized by statute or incorporated into a contract. USDA
      may not cite, use, or rely on any guidance that is not available through their
      guidance portal, except to establish historical facts. x Refer to Chapter 10
      for Federal Income Tax agreement eligibility. 21. Lease Payments x Auto, solar,
      energy, and additional lease payments must have the payment included in the
      monthly debt regardless of the number of months remaining to pay on the contract.
      22. Debt Management Plans x Include the monthly payment amount due from the
      counseling plan. x Refer to Chapter 10 for guidance on credit exception and
      documentation requirements. 11.3 DEBT RATIO WAIVERS AND COMPENSATING FACTORS
      [7 CFR 3555.151(H)(3)] 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 a debt ratio waiver. 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 may be granted if all of the following conditions are met: x Acceptable
      ratio thresholds are met: o The maximum PITI ratio cannot exceed 32 percent,
      and o The maximum TD ratio cannot exceed 44 percent; x The validated credit
      score of all applicants is 680 or greater; HB-1-3555 (03-09-16) SPECIAL PN 11-9
      Revised (05-05-25) PN 640 Guidance documents lack the force and effect of law,
      unless expressly authorized by statute or incorporated into a contract. USDA
      may not cite, use, or rely on any guidance that is not available through their
      guidance portal, except to establish historical facts. x 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 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 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. o The proposed PITI does not exceed
      the applicant’s current verified housing expense by more than $100 or 5 percent,
      whichever is less, for the 12-month period preceding loan application. Verification
      of housing expenses may be documented on a Verification of Rent (VOR), Verification
      of Mortgage (VOM), or credit report, as noted in Chapter 10. The VOR, VOM, or
      credit report must include the actual payment due and report no more than one
      30 day late payment for the previous 12 months. Rent or mortgage payment histories
      from a family member or interested party will not be considered unless 12 months
      of canceled checks, money order receipts, or electronic payment confirmations
      are provided. A history of less than 12 months will not be considered an acceptable
      compensating factor. o The subject property is an energy efficient home based
      on the International Energy Conservation Code (IECC) standards, defined as:
      x For new construction, the dwelling meets or exceeds the IECC in effect at
      the time of construction. The lender is responsible for verifying the home meets
      the IECC standards, with evidence maintained in the lender’s permanent loan
      file. Refer to Chapter HB-1-3555 (03-09-16) SPECIAL PN 11-10 Revised (05-05-25)
      PN 640 Guidance documents lack the force and effect of law, unless expressly
      authorized by statute or incorporated into a contract. USDA may not cite, use,
      or rely on any guidance that is not available through their guidance portal,
      except to establish historical facts. 12 for guidance in documenting thermal
      standards for new construction dwellings. x For existing dwellings, the dwelling
      meets or exceeds the current IECC. Existing dwellings that have been retrofitted
      to meet the current IECC standards are eligible. The lender is responsible for
      verifying the home meets the current IECC standards, with evidence maintained
      in the lender’s permanent loan file. x 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 an 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: x 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: x 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. x Streamlined-assist
      refinance loans do not require debt ratio calculations; therefore, debt ratio
      waivers are not required. x Debt ratios for refinance loans are not limited
      to the maximum purchase debt ratio thresholds. HB-1-3555 (03-09-16) SPECIAL
      PN 11-11 Revised (05-05-25) PN 640 Guidance documents lack the force and effect
      of law, unless expressly authorized by statute or incorporated into a contract.
      USDA may not cite, use, or rely on any guidance that is not available through
      their guidance portal, except to establish historical facts. x The following
      are examples of acceptable compensating factors for debt ratio waiver requests:
      o Validated credit score of 680 or higher for all applicants. o The proposed
      PITI does not exceed the borrower’s current verified mortgage payment by more
      than $100 or 5 percent, whichever is less, for the 12-month period preceding
      loan application. 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 subject property is an energy
      efficient home, defined as a dwelling which meets or exceeds the current International
      Energy Conservation Code (IECC). Existing dwellings that have been retrofitted
      to meet the current IECC standards are eligible. The lender is responsible for
      verifying the home meets the current IECC standards, with evidence maintained
      in the lender’s permanent loan file. x The issuance of the Conditional Commitment
      for a Loan Note Guarantee represents Agency approval of the ratio waiver.'
  judgment: false
