TIP OF THE DAY- FHA CONTINGENT LIABILITY

TIP OF THE DAY: FHA – CONTINGENT LIABILITY

 

Ø     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.  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 Co-Signer liabilities and liabilities resulting from a mortgage assumption without release of liability.

Ø     Lender must include monthly payments on contingent liabilities in the calculation of the Borrower’s monthly obligations unless Lender verifies and documents that there is no possibility that the debt holder will pursue debt collection against the borrower should the other party default of the other legally obligated party has made twelve (12) months of timely payments.

Ø     Lender must obtain the agreement creating the contingent liability or assumption agreement and deed showing transfer of title out of the Borrower’s name.

Co-Signed Liability

Ø     If the co-signed liability is not included in the monthly obligation, Lender must obtain documentation to evidence that the other party to the debt has been making regular on-time payments during the previous twelve (12) months, and does not have a history of delinquent payments on the loan.

Court Ordered Divorce Decree

Ø     Lender must obtain a copy of the divorce decree ordering the spouse to make payments.

Business Debt

Ø     Business Debt in Borrower’s Name refers to liabilities reported on the Borrower’s personal credit report, but payment for the debt is attributed to the Borrower’s business.

Ø     When business debt is reported on the Borrower’s personal credit report, the debt must be included in the DTI calculation, unless Lender can document that the debt is being paid by the Borrower’s business, and the debt was considered in the cash

flow analysis of the Borrower’s business. The debt is considered in the cash flow analysis where the Borrower’s business tax returns reflect a business expense related to the obligation, equal to or greater than the amount of payments documented

as paid out of company funds.   Where the Borrower’s business tax returns show an interest expense related to the obligation, only the interest portion of the debt is considered in the cash flow analysis.

Ø     When a self-employed Borrower states debt appearing on their personal credit report is being paid by their business, Lender must obtain documentation that the debt is paid out of company funds and that the debt was considered in the cash flow analysis of the Borrower’s business.

 

justin brown