From 'Medical Debt Shuts Me Out' to Knowing What Counts: USDA Loans
Savannah started out sure her medical bills would shut her out of a USDA loan, and she ended up knowing exactly which debts count and which ones don't. Her story is fictional and illustrative, but the situation behind it comes up often, and the rule that changed her mind is real.
The assumption that stops buyers before they start
Savannah is a buyer near Hartsville, SC. She carries medical debt, and she assumed any lender would look at it and say no. So she almost did not ask. A situation that comes up often is a buyer ruling herself out of a USDA loan based on a guess instead of the guideline.
I am Jason Sharon, a licensed mortgage broker, and I want you to see what the guideline actually says before you decide anything about your own file.
What the USDA guideline says
The rule is in Paragraph 4.22. Here is the text exactly as written:
The PITI ratio maximum is 33 percent of repayment income. The Total Debt (TD) ratio maximum is 41 percent of repayment income. Borrowers must meet both ratios. Exceptions may be made using compensating factors which must be approved by the next level supervisor. All medical debts are excluded from the total debt ratio when calculating repayment ability.
Read that twice. The last sentence is the one Savannah did not know.
Two ratios, and you have to meet both
PITI stands for principal, interest, taxes, and insurance. The PITI ratio looks at that housing cost against your repayment income, and the guideline caps it at 33 percent.
The Total Debt ratio is the wider view. It looks at your housing cost plus your other recurring debts against your repayment income, and the guideline caps it at 41 percent. Borrowers must meet both ratios, not just one.
Here is where medical debt comes in. The guideline says all medical debts are excluded from the total debt ratio when calculating repayment ability. That is a real advantage for a buyer like Savannah. It does not mean debt stops mattering, though. Other debts, such as car loans or credit cards, generally still count toward the total, so the numbers still have to work.
What compensating factors are
Sometimes a file lands over one of the limits. The guideline says exceptions may be made using compensating factors, and those factors must be approved by the next level supervisor.
That approval step matters. It means the decision does not rest on one person's say-so. I will not tell you that every file qualifies for an exception, because that is not how it works. What I can tell you is that you have the right to ask which factors are being used and whether the approval is in place.
How Savannah used the rule
Once Savannah saw the guideline, her question changed. She stopped asking, "Will my medical bills disqualify me?" and started asking to see the actual ratios. She learned her medical bills stayed out of her total debt ratio, and that her other debts were the ones to look at. She went from a scary maybe to a clear picture of where she stood.
What to ask your loan officer today
You can use the same approach. Ask your loan officer:
"Can you show me my PITI ratio and my total debt ratio on paper, and confirm my medical debts are excluded from the total debt ratio under USDA Paragraph 4.22?"
If the answer shows you are over a limit, ask:
"What compensating factors are you using, and has the next level supervisor approved them?"
It also helps to make a list of your debts before that conversation, so you and your loan officer can sort out which ones are medical and which ones are not.
Talk it through with me
USDA loans have other requirements beyond these two ratios, so the ratios are one piece of the picture, not the whole thing. If you carry medical debt and you are wondering whether a USDA loan is still an option, call me at 843-LOW-RATE. I find the path, and I will walk you through your numbers.
Home Loans Inc - Jason Sharon, Mortgage Broker. Company NMLS #1728740, Jason Sharon NMLS #1281448. Equal Housing Opportunity.
Learn more about this loan program: From 'Medical Debt Shuts Me Out' to Knowing What Counts
