July 2, 2019
If you are preparing for a home loan and want to buy a primary residence with an FHA mortgage, you should know what the FHA loan rules are for “contingent liabilities” which involve the borrower.
A contingent liability is a financial obligation that the FHA loan applicant has co-signed for in the past or is otherwise potentially responsible for should the main borrower default on the financial obligation.
The FHA loan handbook defines contingent liabilities specifically as follows:
“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.”
This has the potential to put the FHA borrower affected by the rule above into a position where the lender will need to verify the nature and severity of the potential financial obligation.
The FHA loan rules in this area include the following:
“The Mortgagee must include monthly payments on contingent liabilities in the calculation of the Borrower’s 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.”
This is one reason why it’s very important to choose wisely when committing to such financial obligations even if they seem like a remote possibility.
And the specific wording of the agreement the co-signer on the contingent liability will be an important detail for the lender thanks to this portion of the FHA home loan rules in such cases:
“The Mortgagee must calculate the monthly payment on the contingent liability based on the terms of the agreement creating the contingent liability. “
When you commit to buying a home-even in the planning stages-it’s important to be careful when committing to such agreements with another person as they may require further development from your lender.
It’s best to ask a loan officer if you have such contingent liabilities as a factor in your home loan-what are that lender’s requirements above and beyond the FHA home loan regulations?
That will be a very important thing to know going forward, especially if there is any danger you the co-signer may actually have to make such payments on behalf of another person.
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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