FHA Loans, Co-signing, and Contingent Liability
November 16, 2015
There are many situations where getting an FHA home loan might be complicated by circumstances--or potentially complicated. One good example--a borrower who has co-signed with a family member on another financial obligation such as a rental unit or a student loan. One common question on topics like these: “How will cosigning affect us if we want to buy a home soon using an FHA loan?”
FHA loan applicants in this case would bring the co-signing situation to the loan process as what’s described as a “contingent liability”. That means basically that the borrower isn’t paying the other person’s debt, but could be obligated to pay under certain circumstances. And that could be counted in the borrower’s debt to income ratio, depending:
HUD 4000.1 has the rules for contingent liability, stating that the lender must, “include monthly payments on contingent liabilities in the calculation of the Borrowers monthly obligations” unless the lender is able to verify and obtain proof, “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.”
Contingent liability is an important issue when it comes to FHA loan approval. If you are considering an FHA home loan in the future, it’s good to think seriously about co-signing and whether or not being a co-signer on another person’s loan could interfere with your chances at loan approval. As we can see from the above, co-signing is not necessarily an automatic barrier to getting an FHA mortgage.
But your lender will definitely need proof as described above. Timing could be the key--If you have only recently co-signed on another person’s loan, the 12 months worth of on-time payments won’t be available as a matter of record to help the lender justify approving your loan. That is very important to consider when reviewing your options.
If you have been a co-signer for longer than 12 months and the payment record is solid, you’re a lot closer to the goal of FHA loan approval. In cases where there might have been a missed payment by the other party, it’s best to wait until that 12 month period as elapsed (with on-time payments) before applying for a new home loan.
FHA loan applicants in this case would bring the co-signing situation to the loan process as what’s described as a “contingent liability”. That means basically that the borrower isn’t paying the other person’s debt, but could be obligated to pay under certain circumstances. And that could be counted in the borrower’s debt to income ratio, depending:
HUD 4000.1 has the rules for contingent liability, stating that the lender must, “include monthly payments on contingent liabilities in the calculation of the Borrowers monthly obligations” unless the lender is able to verify and obtain proof, “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.”
Contingent liability is an important issue when it comes to FHA loan approval. If you are considering an FHA home loan in the future, it’s good to think seriously about co-signing and whether or not being a co-signer on another person’s loan could interfere with your chances at loan approval. As we can see from the above, co-signing is not necessarily an automatic barrier to getting an FHA mortgage.
But your lender will definitely need proof as described above. Timing could be the key--If you have only recently co-signed on another person’s loan, the 12 months worth of on-time payments won’t be available as a matter of record to help the lender justify approving your loan. That is very important to consider when reviewing your options.
If you have been a co-signer for longer than 12 months and the payment record is solid, you’re a lot closer to the goal of FHA loan approval. In cases where there might have been a missed payment by the other party, it’s best to wait until that 12 month period as elapsed (with on-time payments) before applying for a new home loan.
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