When applying for an FHA mortgage, like any home loan, a borrower’s debt-to-income ratio will be an important factor in loan approval. The lender needs to know that the borrower can afford both monthly financial obligations as they exist at application time, and those financial commitments plus the amount of the monthly mortgage payment.
For that reason, the lender will examine a borrower’s existing debt and compare it with verifiable income to see what percentage of the applicant’s income is taken up by bill payments each month.
But what about a borrower’s potential future debt?
Lenders have access to the borrower’s credit reports, and that access is used to see what current FICO scores are plus the applicant’s credit history. One thing that shows up on your credit history? Credit inquiries such as those that may occur when you apply for a new credit card, etc.
If a lender sees a recent inquiry for a line of credit that is not yet on the credit report in terms of payments, what is the obligation when processing an FHA loan application? HUD 4000.1 addresses this issue:
“The Mortgagee must review all credit report inquiries to ensure that all debts, including any new debt payments resulting from material inquiries listed on the credit report, are used to calculate the debt ratios. The Mortgagee must also determine that any recent debts were not incurred to obtain any part of the Borrowers required funds to close on the Property being purchased.”
The FHA rules in this section also define what the FHA considers a “material inquiry”:
“Material Inquiries refer to inquires which may potentially result in obligations incurred by the Borrower for other Mortgages, auto loans, leases, or other Installment Loans. Inquiries from department stores, credit bureaus, and insurance companies are not considered material inquiries.”
As you can see from the above, there are multiple reasons why the lender needs to check on these things. Down payment funds cannot, for example, come from a credit card cash advance or any type of “unsecured loan”. So when the lender sees a credit inquiry on the credit report, he or she also has to verify that it’s not the unapproved source of down payment funds as per HUD 4000.1
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