September 25, 2017
Which of my debts are evaluated for an FHA home loan? Borrowers sometimes get nervous about this issue, especially if they are concerned about carrying too much debt to qualify for a home loan.
FHA loan rules governing how a borrower’s debt load must be reviewed by the lender are found in HUD 4000.1. One section titled “General Liabilities and Debts” states:
“The Mortgagee must determine the Borrower’s monthly liabilities by reviewing all debts listed on the credit report, Uniform Residential Loan Application (URLA), and required documentation.”
The basic answer to the question may depend on whether the lender is manually underwriting the mortgage loan or using the TOTAL system to evaluate the application. TOTAL is an “automatic” underwriting tool, and when using this tool, the lender is instructed as follows:
“All applicable monthly liabilities must be included in the qualifying ratio. Closed-end debts do not have to be included if they will be paid off within 10 months and the cumulative payments of all such debts are less than or equal to 5 percent of the Borrower’s gross monthly income. The Borrower may not pay down the balance in order to meet the 10-month requirement.”
For “manual underwriting” where the lender must personally review application data without using the TOTAL system, we learn:
“All applicable monthly liabilities must be included in the qualifying ratio. Closed- end debts do not have to be included if they will be paid off within 10 months and the cumulative payments of all such debts are less than or equal to 5 percent of the Borrower’s gross monthly income. The Borrower may not pay down the balance in order to meet the 10-month requirement.”
If that seems identical to the TOTAL system’s requirements, that’s because the wording in that particular section of the loan rules is indeed the same.
But manual underwriting may require other documentation, supporting evidence or other paperwork. The bottom line is that the lender is responsible for reviewing information on all debts and not just major lines of credit.
Consider what the FHA loan rules for manual underwriting say about borrower debts on page 261 of HUD 4000.1:
“Accounts for which the Borrower is an authorized user must be included in a Borrower’s DTI ratio unless the Mortgagee can document that the primary account holder has made all required payments on the account for the previous 12 months. If less than three payments have been required on the account in the previous 12 months, the payment amount must be included in the Borrower’s DTI.”
That means it is crucial to maintain a good history of on-time payments, and especially within the 12 months leading up to the loan application. Borrower should not assume that small lines of credit “won’t count” on an FHA mortgage loan application.
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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