The FHA 10-month rule lets you leave a nearly-paid-off installment debt out of your debt-to-income ratio if two conditions are both true: the loan will be paid in full within 10 months of your closing date, and the combined monthly payments on every debt you’re excluding this way add up to no more than 5% of your gross monthly income. Meet both, and the lender drops those payments from your DTI. Miss either, and the payments stay in.
How the Math Works
The idea behind the rule is simple. If a debt is about to disappear, it won’t burden your budget for long after you move in, so FHA lets the lender ignore it. But the 5% cap keeps the exclusion from swallowing large obligations that happen to be close to the end.
Say you earn $6,000 per month before taxes and have seven payments left on a car loan at $350 per month. Seven months clears the 10-month timeline. But $350 is 5.8% of $6,000, which is over the 5% cap of $300. That payment stays in your DTI. Drop the payment to $280 and it slides under the threshold at 4.7%, and the lender can exclude it.
The 5% ceiling is cumulative. If you have two installment loans that each finish within 10 months, their monthly payments combined still have to fit under 5% of your gross monthly income for the exclusion to work.
The stakes on a single payment can be larger than they look. Removing a $300 car payment for a borrower earning $5,000 per month shifts the back-end ratio by six percentage points, which is often the margin between approval and denial.
Which Debts the Rule Covers
FHA defines installment debt as a loan that isn’t secured by real estate and requires fixed periodic payments over a set term. There’s a defined start, a defined end, and a predictable payment. Auto loans, personal loans, and boat loans are the typical examples. These accounts reach a zero balance on a known schedule, which is exactly what the 10-month test measures against.
Revolving debt doesn’t qualify. Credit cards and HELOCs have no fixed payoff date and their minimum payment moves with the balance. Every open revolving account with a minimum payment on your credit report gets counted in your DTI no matter how close to zero you are.
Student Loans
Student loans are installment debts, but FHA handles them on their own track. A $0 payment in deferment or forbearance doesn’t get you out of the calculation. When the actual monthly payment is zero or unavailable, the lender uses 0.5% of the outstanding balance as your assumed payment. On a $40,000 balance, that’s $200 added to your DTI whether you’re paying anything right now or not.
If you’re on an income-driven repayment plan with a documented payment above $0, the lender can use the actual payment instead, provided your loan servicer verifies it. Because income-driven payments are often well below 0.5% of the balance, that documentation is worth chasing.
Auto Leases
Leases look like installment loans on paper. They aren’t treated that way. Lease payments must be included in your DTI as recurring monthly obligations regardless of how many months are left. Three months to go on a car lease still counts. The 10-month rule doesn’t reach leases.
When the Exclusion Won’t Save You
You Can’t Pay Down to Fit
FHA prohibits making a lump-sum payment to shrink a loan’s remaining term into the 10-month window. If you owe 14 payments on a car loan, cutting a check for four of them to leave 10 doesn’t work. Underwriters look at the original amortization schedule, not a manipulated payoff timeline. This is one of the most commonly misunderstood parts of the rule, and lenders catch it routinely.
You Can Pay Off Entirely
Paying a debt off in full is a different matter and is allowed. The distinction is between a partial pay-down (blocked for 10-month purposes) and a complete payoff (permitted). The lender will verify that the account is satisfied and that the money came from an acceptable source. Taking out a new loan to retire the old one defeats the point, since the new obligation just replaces the old one in your DTI.
Debts Tied to Assets You Need
If the loan is secured by an asset the lender requires you to keep, the debt generally stays in your DTI even when it clears both the 10-month and 5% tests. The typical example is a car loan on a vehicle you use to commute to work. Unless you pay the balance off before closing, expect that payment to remain in the ratio.
Underwriter Discretion on Large Balances
Even when a debt technically satisfies both tests, an underwriter can still require it to be paid off if the remaining balance is large enough to pose a risk. It’s a judgment call. A $2,500 residual balance won’t draw attention. A $15,000 balance with only eight payments left, meaning each installment runs close to $1,900, might prompt the underwriter to keep it in the calculation or require full payoff.
What to Give the Lender
To claim the exclusion, expect to document each qualifying debt:
- A payoff statement from the creditor showing the remaining balance, the scheduled payment, and the anticipated final payment date, which must fall within 10 months of your projected closing.
- Confirmation that the account is closed-end rather than revolving. A loan agreement, account statement, or creditor letter showing the original terms and a fixed repayment schedule works.
- Income documentation, since the 5% threshold runs against your gross monthly income. Pay stubs, W-2s, or tax returns already in the file typically cover it.
If you’re paying a debt off entirely at closing instead of relying on the 10-month exclusion, the lender also needs a paper trail for the funds. Two to three months of bank statements are standard, and any large deposits will need a written explanation. Gift funds are often acceptable, but the source must be documented and confirmed not to create a new repayment obligation.