September 20, 2016
In order to insure an FHA loan applicant is a good credit risk, the lender must review the potential borrower’s FICO scores, employment, and debt-to-income ratio.
The debt ratio is an important part of the overall determination for lenders to approve or deny an FHA loan application. That’s one reason we often point out that FICO scores alone don’t make or break a home loan application, but instead a variety of factors are used to approve the loan; FHA requirements include your loan repayment history, FICO scores, debt to income ratio, and employment history.
HUD 4000.1 instructs the lender to review a borrower’s monthly financial obligations on page 177, stating:
“The Mortgagee must determine the Borrowers monthly liabilities by reviewing all debts listed on the credit report, Uniform Residential Loan Application (URLA), and required documentation. All applicable monthly liabilities must be included in the qualifying ratio.”
“Closed end” debts may not be counted in this equation if that debt meets certain criteria. “Closed-end debts do not have to be included if they will be paid off within 10 months and the cumulative payments of all such debts are less than or equal to 5 percent of the Borrowers gross monthly income. The Borrower may not pay down the balance in order to meet the 10-month requirement.”
Some types of debt in the borrower’s name, or associated with the borrower, must be counted even though the obligation is not necessarily one where the applicant is making payments.
From HUD 4000.1: “Accounts for which the Borrower is an authorized user must be included in a Borrowers DTI ratio unless the Mortgagee can document that the primary account holder has made all required payments on the account for the previous 12 months. If less than three payments have been required on the account in the previous 12 months, the payment amount must be included in the Borrowers DTI.”
That is important to know. If you are an authorized user on another person’s account, it is crucial to have the required number of payments within the 12 month period leading up to the mortgage loan. That’s one reason why it’s strongly advised to begin preparing for an FHA mortgage loan application in advance. Some borrowers need more time to resolve issues such as these.
It can take several months to work on issues like this, so it’s best to begin investigating these areas at least a year prior to turning in your loan application.
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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