Installment debt is any loan you repay in equal monthly payments until a set end date. Car loans, personal loans, furniture financing and student loans are the common ones. Lenders put the monthly payment, not the balance, into your debt-to-income ratio (DTI), which is the house payment plus all monthly debts divided by gross monthly income. A revolving debt such as a credit card works differently, because its balance and payment move every month.
The 10-month rule, program by program
A loan that's about to end won't strain a 30-year budget for long, so each program has a rule for debts near their last payment.
| Program | When a short-term installment debt can be left out |
|---|---|
| FHA | Paid off within 10 months, and all such payments together total 5% of gross monthly income or less. Paying a balance down to reach 10 months isn't allowed. |
| Conventional (Fannie Mae) | 10 or fewer monthly payments remain, unless the payment significantly affects your ability to meet your obligations |
| VA | A debt with less than 10 months left can be left out, unless its payment would strain the budget in the months right after closing |
| USDA | 10 or fewer months remain on that account and its payment is 5% of monthly income or less. Paying down to 10 months is allowed. |
Leases are the exception. Fannie Mae and USDA count a car or solar lease payment no matter how few months are left.
A worked example on $5,000 a month
Jordan earns $5,000 a month gross and has three installment debts:
- A car loan at $410 a month with 30 payments left
- A personal loan at $150 a month with 9 payments left
- Furniture financing at $95 a month with 7 payments left
The two short-term payments add up to $245. FHA's 5% test allows $250 on $5,000 of income ($5,000 × 5%), and $245 is under it, so FHA counts only the $410 car payment. USDA tests each account on its own: $150 and $95 are each under $250, so USDA leaves both out too. Conventional can leave both out because each has 10 or fewer payments remaining.
Jordan's counted debt drops from $655 to $410 a month. That $245 of room, put toward principal and interest at a 5.75% rate, carries about $42,000 of loan.
Change one fact: suppose the personal loan has 12 payments left. FHA counts it, and Jordan can't pay it down to 10 months to get around the rule. USDA allows that paydown, so two extra payments would take it out of Jordan's USDA ratios.
Lowering what counts
- Paying an installment loan off in full removes its payment on every program. Keep the payoff letter and proof the funds came from your own account or a documented gift.
- Ask us before making extra payments. A loan sitting at 11 payments left may drop out on its own by the time you apply.
- Hold off on new loans until after closing. Each new payment comes straight out of your house payment room.
Run your debts through the DTI calculator with and without the short-term loans to see how much room they take. Then call AAA Capital Funding at 888-601-8344 with each loan's payment and months remaining, and we'll tell you which ones your program can leave out.