March 27, 2017
A reader asked us a question about FHA loans and co-signers recently. “If I cosigned for a friend and he refinanced to get everything put in his name and me taken off, am I eligible for an FHA loan for my own home?”
FHA mortgage loan requirements refer to co-signer arrangements and “contingent liabilities”. HUD 4000.1 says:
“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. Contingent liabilities may include Cosigner liabilities and liabilities resulting from a mortgage assumption without release of liability.”
If the reader’s circumstances meet that definition of a contingent liability, the following could apply if the record shows the borrower is obligated on the co-signed loan in any way:
“The Mortgagee must include monthly payments on contingent liabilities in the calculation of the Borrowers monthly obligations 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.”
Having co-signers legally removed from obligation on the mortgage may depend on state law, lender standards, and other factors. Assuming the borrower is legally free and clear and is otherwise financially qualified, an FHA loan may be possible. The lender will require documentation of this, so a borrower who finds themselves in the reader’s situation will do best to assume that such documentation is required at application time.
The situation mentioned in the reader’s question depends greatly on non-FHA rules and regulations depending on the state and other factors. It’s never safe to assume FHA and lender standards are met-obtaining supporting documentation should definitely be on the borrower’s to-do list long before applying for the loan, whenever possible.
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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