When some FHA mortgage loan applicants fill out their loan paperwork, it may be tempting to leave recent or new financial obligations out of that paperwork. In some cases it may be a simple oversight, in others it might be a question of an applicant mistakenly thinking that the lender won’t know or can’t find out.
What’s the reality?
FHA loan rules anticipate situations like these. In HUD 4155.1, Chapter Four, Section C, there’s a heading titled, “Recent and/or Undisclosed Debts or Inquiries”. It states:
“Lenders must determine the purpose of any recent debts, as the borrower may have incurred the indebtedness to obtain the required cash investment.”
That means that the lender must, among other things, determine whether the borrower has gone into debt in order to make his or her down payment.
Down payment funds can only come from approved sources, so the lender must verify that new or undisclosed debt not from an approved down payment source (such as investments, personal savings, collateralized loans, etc) is not being used to make the down payment.
But that’s not all.
“A borrower must provide a satisfactory explanation for any significant debt that is shown on the credit report but not listed on the loan application. Written explanation is required for all inquiries shown on the credit report for the last 90 days.”
FHA loans tell the lender to do the following in such cases:
- Verify the actual monthly payment amount of any undisclosed indebtedness.
- Include the monthly payment amount and resubmit the loan if the liability is greater than $100 per month.
- Determine that any funds borrowed were not/will not be used for the borrower’s cash investment in the transaction.
- Explanation is not required for inquiries.
It’s not advisable to leave any required information off your credit application, but sometimes oversights can and do occur. An honest mistake is one thing, but FHA loan rules are designed to prevent more deliberate concealment of debt and whether that debt is being used to make a down payment beyond the scope of FHA loan regulations.
Do you have a question about FHA home loans? Ask us in the comments section.