When your loan officer reviews your financial details in order to make sure you are a good credit risk for a mortgage loan, there are many factors to consider. Some borrowers have less debt than others, and some debts are not necessarily personal loans, personal credit cards, etc. Sometimes business debt can factor into the equation.
FHA loan rules for calculating certain types of business debt into a borrower’s debt to income ratio are found in HUD 4000.1, which begins on page 185 with a definition:
“Business Debt in Borrowers Name refers to liabilities reported on the Borrowers personal credit report, but payment for the debt is attributed to the Borrowers business.”
The basic instructions to the lender here are fairly simple:
“When business debt is reported on the Borrowers personal credit report, the debt must be included in the DTI calculation…” unless the lender can obtain documentation that the business debt listed on the borrower’s credit report is, “being paid by the Borrowers business, and the debt was considered in the cash flow analysis of the Borrowers business.”
FHA mortgage loan rules also add, “The debt is considered in the cash flow analysis where the Borrowers 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 Borrowers 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.”
There’s an important paragraph which follows the above in HUD 4000.1, that applies specifically to self-employed FHA loan applicants. It says, “When a self-employed Borrower states debt appearing on their personal credit report is being paid by their business, the Mortgagee 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 Borrowers business.”
These issues are important to remember in the planning stages of your mortgage loan application. Debt to income ratios can be just as important as FICO scores in the process of loan approval, so it’s crucial to know how your business debt might factor into the application as mentioned above.