What is undisclosed debt and how can it affect your FHA home loan application? Undisclosed debt is basically credit information that is either not listed by the borrower on the credit application, or debt that does not show up yet on a credit report. There are several reasons why a lender would be concerned by undisclosed debt and FHA loan rules anticipate situations where such problems occur.
Undisclosed Non-Mortgage Debt
FHA loan rules for this type of debt which is not volunteered by the borrower on a mortgage application (or does not show up on the borrower’s credit report) are found on page 187 of the FHA loan handbook, HUD 4000.1. There we find these instructions to the lender:
“When a debt or obligation (other than a Mortgage) not listed on the mortgage application and/or credit report and not considered by the AUS is revealed during the application process, the Mortgagee must:
-verify the actual monthly payment amount;
-re-submit the Mortgage for evaluation by TOTAL if the cumulative change in the amount of the liabilities that must be included in the Borrower’s debt increases by more than $100 per month; and
-determine that any funds borrowed were not/will not be used for the Minimum Required Investment”
As you can see from the last line above, one of the reasons that undisclosed debt can be a serious issue for FHA home loans is the question of the down payment and its’ sources.
The lender is required to insure that down payment funds do not come from unapproved sources such as credit card cash advances, “gifts” that have an expectation of repayment or other obligation, or other sources not permitted by FHA mortgage loan rules.
Undisclosed Mortgage Debt
Page 188 of the FHA Loan Handbook addresses this issue, instructing the lender:
“When an existing debt or obligation that is secured by a Mortgage but is not listed on the credit report and not considered by the Automated Underwriting System is revealed during the application process, the Mortgagee must obtain a verification of Mortgage directly from the Servicer. The Mortgage must be downgraded to a Refer and manually underwritten if the mortgage history reflects:
-a current delinquency;
-any delinquency within 12 months of the case number assignment date; or
-more than two 30 Day late payments within 24 months of the case number assignment date.
A Mortgage that has been modified must utilize the payment history in accordance with the modification agreement for the time period of modification in determining late Mortgage Payments.”
The lender is given clear instructions in these cases, and borrowers should fully expect that such undisclosed debt will be addressed at some point in the loan application process. Undisclosed debt is not always a simple matter of a borrower trying to omit certain information in the hopes that it will improve chances at loan approval, but lenders are charged with handling these matters in a specific way regardless of cause.