Do you know what your lender is required to do when you fill out an FHA mortgage loan application? Part of the lender’s job is to make
HUD 4000.1, the FHA Lender’s Handbook for single family mortgages, has instructions for the lender in this area. It begins stating the lender’s responsibilities:
“The Mortgagee must determine the Borrower’s monthly liabilities by reviewing all debts listed on the credit report, Uniform Residential Loan Application (URLA), and required documentation.”
How is that accomplished? “All applicable monthly liabilities must be included in the qualifying ratio. ” Your lender will calculate your debt ratio using one method that includes only your current debt, and another method that includes the amount of your projected monthly mortgage payment.
Certain kinds of debt may not need to be included in that ratio. HUD 4000.1 says that closed-end debt can be excluded if it will be paid off in 10 months and the cumulative payments “…of all such debts are less than or equal to 5 percent of the Borrower’s gross monthly income. The Borrower may not pay down the balance in order to meet the 10-month requirement. “
There are other considerations, too. What about credit accounts you may or may not use, but are listed as a co-applicant, co-borrower, etc.? HUD 4000.1 tells the lender:
” Accounts for which the Borrower is an authorized user must be included in a Borrower’s (debt-to-income ratio) unless the Mortgagee can document that the primary account holder has made all required payments on the account for the previous 12 months. If less than three payments have been required on the account in the previous 12 months, the payment amount must be included in the Borrower’s (debt-to-income ratio).”
It’s a very good idea to review your current credit accounts and decide whether or not to continue being an authorized borrower on the accounts of others before proceeding with your home loan application.
Being a co-signer or co-borrower is also something the lender must look into. If you have “contingent liabilities” as a co-signer, your loan officer may need additional documentation from you and it’s good to be prepared for that.
The lender needs to know whether you have been required to pay as a co-signer, the amount of those