June 4, 2020

Vimeo Channel YouTube Channel

FHA Mortgage Loan Rules: Business Debt

146When 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.

Joe Wallace - Staff Writer

By Joe Wallace

September 19, 2016

Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.

Connect with Joe:


Browse by Date:

About FHANewsBlog.com
FHANewsBlog.com was launched in 2010 by seasoned mortgage professionals wanting to educate homebuyers about the guidelines for FHA insured mortgage loans. Popular FHA topics include credit requirements, FHA loan limits, mortgage insurance premiums, closing costs and many more. The authors have written thousands of blogs specific to FHA mortgages and the site has substantially increased readership over the years and has become known for its “FHA News and Views”.

5850 San Felipe Suite #500, Houston, TX 77057 281-398-6111.
FHANewsBlog.com is privately funded and is not a government agency.

Share This