February 5, 2018
Does being a cosigner on another loan or line of credit affect your chances at FHA home loan approval? It’s a good question to ask before you commit yourself to being named on another person’s loan.
HUD 4000.1 has the FHA loan rules for “contingent liabilities” created when you cosign another person’s loan, starting with the basic definition of the term:
“A Contingent Liability refers to a liability that may result in the obligation to repay only when a specific event occurs. For example, a contingent liability exists when an individual can be held responsible for the repayment of a debt if another legally obligated party defaults on the payment.”
This section of the FHA home loan rules adds that contingent liabilities can include, “Cosigner liabilities and liabilities resulting from a mortgage assumption without release of liability.”
The contingent liabilities issue is very important when the lender is trying to calculate the borrower’s debt-to-income ratio. FICO scores and other credit history data aren’t the only factors used to decide whether to approve your loan or not.
Your ability to afford the loan is also examined, hence the need to determine a borrower’s monthly debt compared to his or her monthly income.
HUD 4000.1 tells the lender that monthly payments on these liabilities in the debt ratio, “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”.
What is the required documentation your loan officer will need in these cases? It depends on the nature of the debt; mortgage assumption paperwork, court-ordered divorce decrees, and “cosigned liabilities” may all need to be recorded as part of the loan application.
These are the FHA loan minimums; your lender may have additional requirements that must be met depending on the rules at that financial institution.
It’s also worth nothing that simply being a co-signer on someone else’s loan or credit line isn’t an automatic problem when applying for an FHA mortgage. It is good to be aware of the lender’s requirements in these matters in case you find these or other rules relevant to your needs as a borrower.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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