When applying for an FHA home loan in New Jersey, every detail of your debt-to-income (DTI) ratio matters. Many borrowers assume that an installment loan with 10 or fewer payments remaining can be automatically excluded from DTI, but FHA adds one more requirement that is often overlooked.
FHA’s Additional Rule for Installment Debt
Under FHA guidelines, an installment debt can only be omitted from the borrower’s DTI calculation if:
1. The debt has 10 or fewer payments remaining, and
2. The monthly payment does NOT exceed 5% of the borrower’s qualifying income.
If the payment is more than 5% of qualifying income, it must be included, even if fewer than 10 payments remain.
Real-World Examples
Example 1
- Total monthly income: $12,000
- Installment payment: $550
- 5% of income = $600
- Result: 4.5% — OK to omit
Here, the payment falls below the 5% threshold. Even with fewer than 10 payments left, the borrower benefits from the FHA rule and can exclude this debt from their DTI.
Example 2
- Total monthly income: $12,000
- Installment payment: $775
- 5% of income = $600
- Result: 6.45% — NOT OK to omit
Even though the debt may be close to being paid off, the payment exceeds the 5% cap, so FHA requires it to be counted in the borrower’s DTI.
New Jersey’s mix of suburban, urban, and high-cost housing markets means borrowers often push up against maximum DTI limits. Understanding FHA’s installment-debt rule upfront can:
- Improve your approval chances
- Help you estimate your real qualifying numbers
- Prevent surprises during underwriting
- Allow strategic payoff timing when appropriate
Speak with one of our New Jersey FHA mortgage specialist today.
