June 6, 2013
FHA loan rules cover a wide range of circumstances and situations. Many of these rules were written in anticipation of needs that, while not as common as some, still might be in demand many times over the course of a single fiscal year based on the sheer volume of FHA mortgage loan applications.
One set of rules governs something known as “contingent liability”, which the FHA loan rulebook describes in HHUD 4155.1 Chapter Four, Section C.
“A contingent liability exists when an individual is held responsible for payment of a debt if another party, jointly or severally obligated, defaults on the payment.” This sort of obligation may be known as a co-sign agreement, a co-borrower or co-obligor arrangement. FHA loans require any borrower who has a contingent liability to list it on an FHA loan application along with other debts or financial obligations.
What is the lender required to do if an FHA loan applicant lists a contingent liability? According to the FHA official site, “The underwriter must consider a contingent liability when the borrower remains obligated on an outstanding FHA-insured, VA-guaranteed, or conventional mortgage secured by property that he/she
• has sold or traded within the last 12 months without a release of liability, or
• is about to sell on assumption without a release of liability being obtained.”
FHA loan rules add that, “The contingent liability policies described in this topic apply unless the borrower can provide conclusive evidence from the debt holder that there is no possibility that the debt holder will pursue debt collection against him/her should the other party default.”
FHA loan rules do allow the lender to ignore contingent liabilities in some cases. FHA loan assumption is one such instance; FHA loan rules state, “When a mortgage is assumed, contingent liabilities need not be considered if
- the originating lender of the mortgage being underwritten obtains, from the servicer of the assumed loan, a payment history showing that the mortgage has been current during the previous 12 months, or
- the value of the property, as established by an appraisal or the sales price on the HUD-1, Settlement Statement from the sale of the property, minus the upfront mortgage insurance premium (UFMIP), results in an loan-to-value (LTV) ratio of 75% or less.”
For more information on contingent liability issues, contact the FHA directly at 1-800-CALL-FHA.
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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