What is considered debt?

Question

If my primary home is free and clear, are the home insurance and property tax considered debt? There is no escrow account and it does not show up on my credit.

Evan Salvador · Answer

@Stephen Nava I wouldn't consider property tax and home insurance a debt.  Those are expenses.    Some people use them interchangeably.   I consider debt, money you borrowed that you have to pay back.  You don't owe tax or home insurance unless you're late on the payments.  If you consider those debts, then no one on earth is ever debt free.

Chris Mason · Answer

The most correct term is probably "monthly liability" not "debt," but for the purposes of calculating DTI it's identical. Semantic difference, not substantive.

HOA is also included in DTI. Fannie is starting to replace "PITI" in her guidelines with "PITIA" ubiquitously for this reason, with the A standing for "(homeowner's) association dues."

Same if you owe child support or alimony according to a court order, which in my state also generally does not appear on a credit report (unless a judge catches wind that you didn't pay it, and slaps it on your credit for lenders/employers/landlords to see as a consequence). Technically this isn't a "debt" (unless you don't pay), but it's still included as a "monthly liability," and there is no arithmetical difference between "debt" and "monthly liability" when calculating DTI.

An IRS payment plan for your income taxes (common for folks that had a sudden spike in income) is another thing that's included in DTI that does not appear on your credit report.

Between the lines in some posts on BP, there is some fuzzy notion that if it does not appear on a credit report, it "can't" be counted. Not true.

The only theoretical way to have some of this excluded is that technically if you don't have a mortgage, you don't need homeowner's insurance, because there is no lender forcing you to have it, and (in CA at least) there is no law otherwise requiring it. So, if you're completely foolish, you can cancel the insurance policy on your free-and-clear door-painted-red home, and not have that $68/mo a DTI factor, but this is probably a completely horrible, horrible, horrible, idea, because I can guarantee you that the Real Estate Gods will light your house on fire the day after the insurance is cancelled.

Chris Mason · Answer

Typically whatever the most current/recent number that appears on the county property tax bill website is. If you provide an older tax bill so the lender doesn't have to pull it, and the underwriter might not catch it, you might slide through... but "hope the underwriter doesn't notice!" is generally not an ideal game plan today, like it was in 2006.

I bet more aggressive use of rental income will solve your DTI problem. Or, if self employed and the business is >5 years old, flip it from Fannie to Freddie and use 1 year of tax returns instead of 2. I obviously haven't seen any of your paperwork, but those are my first two hunches.

Melvin List · Answer

@Stephen Nava yes the taxes and insurance on any property owned with be included in your debt to income ratio and anything that is reporting on your credit report

Chris Mason · Answer

If you're self employed and the business is >5 years old, depending on the type of business, you can often use 1 year of tax returns instead of a 2 year average.

Stephen Nava · Answer

@Chris Mason

What are the advantages of flipping to Freddie?

Stephen Nava · Answer

I really appreciate the help. My property tax is about $7100 annual and this is really screwing up my DTI. Sometimes lenders make careless mistakes and calculate my numbers incorrectly. I wanted to make sure that I was getting denied a loan program for legitimate reasons. Do lenders use 2016 property tax or 2017?

Evan Salvador · Answer

They will count that towards your debt to income ratio.   Part of you credit score is determined by how many open credit accounts you have and how long they have been open.  Tax and insurance would not count towards towards those open accounts.  Only other times, you'd see tax on your credit report is if the government body files a lien against you or your property.

Kyle J. · Answer

Here's a good article on the topic:

What is a Debt-to-Income Ratio (DTI) and How is it Calculated?

Stephen Nava · Answer

Do lenders count property tax and home insurance as debt even without an escrow account and no record on credit?

What is considered debt?

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