12 Months: The USDA Rule That Can Erase a Cosigned Debt From Your Ratio

12 months. That is the exact number of on-time payments a USDA loan file needs to see before a cosigned debt can be left out of your debt-to-income ratio. It is a detail that trips up a lot of applicants, including a USDA applicant we will call Theresa, who lives near Lake City.

A Debt That Wasn't Even Hers to Worry About

Years earlier, Theresa cosigned a truck loan for a sibling. She never missed a payment on anything in her own name. But when she applied for a USDA loan, that truck payment showed up in full on her credit report, and her loan originator counted it straight into her debt-to-income ratio. It was straining her approval, even though she had nothing to do with actually making those payments month to month.

This is a situation that comes up often with USDA applicants who have cosigned for a family member at some point. The assumption is usually that if your name is on the loan, it counts against you, full stop. That assumption is not quite right.

What the USDA Guideline Actually Says

USDA's own handbook, HB-1-3555, lays out the rule directly: "If the applicant is a cosigner on a loan or any other obligation, the debt must be included in the TD ratio. The Loan Originator should never omit a credit report liability with a balance greater than zero unless strong supporting documentation is provided to evidence that the primary signer has been making on-time payments during the previous 12 months. Debt from which the applicant has not been released need not be counted if another party has paid the creditor directly for at least 12 months."

In plain terms: a cosigned debt counts by default. But it does not have to, if you can document that the actual borrower, the primary signer, has made every payment directly for the past year.

How Theresa Solved It

Theresa's sibling had, in fact, made every single truck payment directly for well over a year. The debt wasn't the problem. The missing paperwork was. So Theresa requested a 12-month payment history letter from the creditor, documentation that proved the primary signer, not her, had been making the payments on time, directly, for the full 12 months.

Then she brought it to her loan originator with a clear, specific ask: "This is a cosigned account where the primary signer has made all payments directly for the last 12 months. Here's the documentation to support excluding it under Paragraph 4.22.B.2." That one conversation, backed by one letter, got the truck payment pulled out of her ratio.

What to Do if This Is Your File

If you have a cosigned loan sitting on your credit report and you are applying for USDA financing, do not assume it is permanently stuck counting against you. Start with the creditor: ask for a payment history letter showing who has actually been making the payments, and for how long. If it has been 12 months or more of direct payments from the primary signer, bring that letter to your loan originator and cite the guideline by name.

Cosigned debt is one of the more fixable snags in a USDA file, but only if someone asks the right question early, before the file goes to underwriting.

If you have a cosigned debt on your credit report and you are working toward a USDA loan, call me, Jason Sharon, at 843-569-7283. I find the path.

Home Loans Inc - Jason Sharon, Mortgage Broker. Company NMLS #1728740, Jason Sharon NMLS #1281448. Equal Housing Opportunity.

Learn more about this loan program: 12 Months