Payoff or paydown of debt solely to qualify must be carefully evaluated and considered in the overall loan analysis. The borrower’s history of credit use should be a factor in determining whether the appropriate approach is to include or exclude debt for qualification. Generally
Installment loans that are being paid off or paid down to 10 or fewer remaining monthly payments do not need to be included in the borrower’s long-term debt.
If a revolving account balance is to be paid off at or prior to closing, a monthly payment on the current outstanding balance does not need to be included in the borrower's long-term debt, i.e., not included in the debt-to-income (DTI) ratio. Such accounts do not need to be closed as a condition of excluding the payment from the DTI ratio.
See B3-6-02, Debt-to-Income Ratios for additional guidance on calculating total monthly obligations for qualifying purposes.
For open 30-day charge accounts that do not reflect a monthly payment on the credit report, or 30-day accounts that reflect a monthly payment that is identical to the account balance, lenders must verify borrower funds to cover the account balance. The verified funds must be in addition to any funds required for closing costs and reserves.
Note: DU will include the balance of the 30-day charge accounts on the loan application in the Reserves Required to be Verified amount shown on the DU Underwriting Findings report. However, for transactions that do not require the verification of reserves, the balance of 30–day charge accounts in the Reserves Required to be Verified amount will be reduced by any cash out the borrower will receive through the transaction.
If the borrower paid off the account balance prior to closing, the lender may provide proof of payoff in lieu of verifying funds to cover the account balance.
Delinquent credit—including taxes, judgments, charge-offs of non-mortgage accounts (see below for exceptions), tax liens, mechanics’ or materialmen’s liens, and liens that have the potential to affect Fannie Mae’s lien position or diminish the borrower’s equity—must be paid off at or prior to closing.
Delinquent federal income taxes that are approved to be paid by a monthly installment agreement with the IRS must be paid in full at or prior to closing if there is any indication that a Notice of Federal Tax Lien has been recorded against the borrower in the county in which the subject property is located. For additional information about federal income tax installment agreements, see B3-6-05, Monthly Debt Obligations.
For details regarding delinquent federal income taxes that the IRS has approved to be paid through an installment agreement that can be included as a monthly debt obligation, rather than being paid in full, also see B3-6-05, Monthly Debt Obligations.
For manually underwritten loans, collection accounts and charge-offs on non-mortgage accounts do not have to be paid off at or prior to closing if the balance of an individual account is less than $250 or the total balance of all accounts is $1,000 or less. Collection accounts and charge-offs on non-mortgage accounts that exceed these limits do not have to be paid off at or prior to closing, provided the lender can document a strong credit profile, and meaningful financial reserves.
For DU underwritten loans, refer to B3-5.3-09, DU Credit Report Analysis.
The table below provides references to the Announcements and Release Notes that have been issued that are related to this topic.
|Announcements and Release Notes||Issue Date|
|Announcement SEL-2018-01||January 30, 2018|
|Announcement SEL-2016–08||October 24, 2016|
|Announcement SEL-2015–06||May 26, 2015|
|Announcement SEL-2014–10||July 29, 2014|
|Announcement SEL-2014–03||April 15, 2014|
|Announcement SEL-2013–03||April 9, 2013|
|DU Version 9.0||March 19, 2013|
|Announcement SEL-2012-13||November 13, 2012|
|Announcement SEL-2012–07||August 21, 2012|
|DU Version 9.0||July 24, 2012|
|Announcement SEL-2010-13||September 20, 2010|
|DU Version 8.2||September 20, 2010|