June 25, 2015
Are you concerned about your debt to income ratio going into the FHA loan application process? Do you wonder how your chosen FHA lender will view your existing debts and whether debts that are scheduled to be paid off at some point in the near future might affect your FHA loan application?
It helps to know what the FHA loan rulebook says about a borrower’s overall credit worthiness. At the time of this writing, the FHA and HUD are preparing to transition to a new FHA loan rulebook, but the previous references still apply until then. On the FHA official site you will find HUD 4155.1, which includes a section in Chapter Four about how the lender is to analyze the borrower’s credit. That section says in part:
“When analyzing a borrowers credit history, the underwriter must examine the overall pattern of credit behavior, not just isolated occurrences of unsatisfactory or slow payments.”
So the lender is theoretically examining your “big picture” financial record. There are two areas the lender may pay special attention to, depending on circumstances. One is recent debts prior to the FHA loan application. On this subject, FHA loan rules state:
“Lenders must determine the purpose of any recent debts, as the borrower may have incurred the indebtedness to obtain the required cash investment.” FHA loan rules do not allow the borrower to use certain types of credit for the down payment–any payday loan or non-secured loan funds would not be allowed.
The lender is also required to examine the nature of debt such as student loans or other types of lending that may start requiring payments shortly after the loan closes, if not before. If such a debt can be deferred, the lender might have the option of not counting it toward the borrower’s debt to income ratio. But what about debts that could be paid off shortly after the loan closes?
FHA loan rules say, “Debts lasting less than ten months must be included if the amount of the debt will affect the borrowers ability to pay the mortgage during the months immediately after loan closing, especially if the borrower will have limited or no cash assets after loan closing.
Note: Monthly payments on revolving or open-ended accounts, regardless of their balances, are counted as liabilities for qualifying purposes even if the
accounts appear likely to be paid off within ten months or less.”
As you can see from the above, it’s important to know where you stand with such debt–before, during, and after it has been paid off. Borrowers who are deemed to have sufficient resources to pay their mortgage along with the existing debts at application time may have a much better chance at FHA loan approval.
Do you have questions about FHA loan applications? Ask us in the comments section.
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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