March 12, 2015
We often post about FHA loan preparation time, advising borrowers to give themselves at least 12 months before turning in an application for the FHA mortgage. Part of this is so the borrower can check credit reports, but also to insure that at least 12 months have gone by without the borrower missing any payments on financial obligations.
Part of this advice also includes the notion that a borrower not apply for any new lines of credit for the 12 months leading up to the loan application for the FHA mortgage. There are several reasons for this, one of the most important being that new credit opens up the potential for a higher debt-to-income ratio.
That higher ration can work against the borrower, especially in cases where the debt to income ratio is already marginal or close to being so. If you have high levels of ongoing debt and not enough income to cover them and the mortgage, you could be in danger of having your FHA home loan denied.
But there is another reason to avoid running up new debt in the short term leading up to the loan application. According to HUD 4155.1, the lender is required to check the sources of your down payment funds–they must come from approved sources like savings, etc. but NOT from “non collateralized debt” sources like cash advances on credit cards or non-collateralized personal loans.
According to HUD 4155.1 Chapter Four:
“Lenders must determine the purpose of any recent debts, as the borrower may have incurred the indebtedness to obtain the required cash investment. A borrower must provide a satisfactory explanation for any significant debt that is shown on the credit report but not listed on the loan application. Written explanation is required for all inquiries shown on the credit report for
the last 90 days.”
According to Chapter Four, the lender must:
“–Verify the actual monthly payment amount of any undisclosed indebtedness.
–Include the monthly payment amount and resubmit the loan if the liability is greater than $100 per month.
–Determine that any funds borrowed were not/will not be used for the borrower’s cash investment in the transaction.”
That is important to keep in mind as sources of the down payment are carefully scrutinized.
Do you have questions about FHA home loans? 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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