March 1, 2016
We’ve gotten a variety of questions in the comments section in early 2016 about FHA loan rules for student loans, co-signing, and how the FHA loan program rules view things like deferred obligations and contingent liabilities. Those two terms can be a bit confusing, so it’s good to know what they are and how they can affect your FHA loan application.
A deferred obligation is basically any arrangement that resembles a student loan deferment where an amount is owed, but the payment for that obligation may be reduced or delayed as part of an arrangement made between the lender and borrower. In cases where this type of debt is concerned, HUD 4000.1 states that the loan officer must:
“…use the actual monthly payment to be paid on a deferred liability, whenever available. If the actual monthly payment is not available for installment debt, the Mortgagee must utilize the terms of the debt or 5 percent of the outstanding balance to establish the monthly payment. For a student loan, if the actual monthly payment is zero or is not available, the Mortgagee must utilize 2 percent of the outstanding balance to establish the monthly payment.”
For those who have co-signed a student loan or any other form of financial obligation (this is known as a “contingent liability”), HUD 4000.1 states, “The Mortgagee must include monthly payments on contingent liabilities in the calculation of the Borrowers monthly obligations unless the Mortgagee verifies and documents that there is no possibility that the debt holder will pursue debt collection against the Borrower should the other party default or the other legally obligated party has made 12 months of timely payments.”
HUD 4000.1 has a specific definition for the lender when it comes to contingent liability, which is defined specifically as, “when an individual can be held responsible for the repayment of a debt if another legally obligated party defaults on the payment. Contingent liabilities may include Cosigner liabilities and liabilities resulting from a mortgage assumption without release of liability.”
It’s important to give consideration to your future home buying or refinancing plans when co-signing on another person’s financial obligation. If you aren’t sure what the implications might be for co-signing, be sure to ask what level of financial obligation might be implied by signing the paperwork and whether it could fall under the above definition as a “contingent liability”.
Do you work in residential real estate? You should know about the free tool offered by FHA.com. It is designed especially for real estate websites; a widget that displays FHA loan limits for the counties serviced by those sites. It is simple to spend a few seconds customizing the state, counties, and widget size for the tool; you can copy the code and paste it into your website with ease. Get yours today:
http://www.fha.com/fha_loan_limits_widget
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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