January 23, 2018
FHA loan rules for debt-to-income ratios (DTI) include guidelines for the lender when the loan applicant has debts listed in his or her name, but those debts are actually those of the borrower’s business. What do you need to know about this type of debt?
Before addressing that issue, it’s important to point out that debt ratios are a very important part of the FHA loan approval process.
The higher the amount of your monthly debt compared to your monthly income, the harder your loan officer has to work to justify approving the loan.
A borrower with too much monthly debt may be required to have compensating factors as a condition of loan approval. Those factors can be a larger down payment, substantial savings in cash, or other things as determined by the lender.
The lender will handle these situations on a case-by-case basis, so no two circumstances may be handled the same way. Much depends on lender standards, state law, and other factors.
When it comes to business debt in the borrower’s name, the FHA loan handbook HUD 4000.1 starts by defining what is meant:
“Business Debt in Borrower’s Name refers to liabilities reported on the Borrower’s personal credit report, but payment for the debt is attributed to the Borrower’s business.”
What must the lender do in such cases?
“When business debt is reported on the Borrower’s personal credit report, the debt must be included in the DTI calculation, unless the Mortgagee can document that the debt is being paid by the Borrower’s business, and the debt was considered in the cash flow analysis of the Borrower’s business.”
HUD 4000.1 adds that the debt is considered “in the cash flow analysis where the Borrower’s 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.”
Furthermore, “Where the Borrower’s 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.”
The lender is required to collect documentation in these circumstances that support the borrower’s claim that the debt is indeed a business expense.
“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 Borrower’s business.”
Additional lender standards and requirements may apply, depending on a variety of factors including state law.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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