October 26, 2020

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FHA Loan Credit Questions: Co-Signing

108Here is a variation on a common question about FHA home loans:

“I think my credit is fairly good but I have two cars in my name–one of which I thought I was only the co-signer. I’ve recently found a property that is fairly reasonable and my question is will my co-signing affect the loan approval decision? I do not make the payments on the second vehicle.”

HUD 4000.1 has a great deal to say about credit, financial liabilities, and related issues. What does it say about this reader’s question? The general philosophy of the FHA is toward applicant credit information includes the notion that your credit history is the “most useful guide” determining things like:

  • The loan applicant’s attitude toward credit obligations;
  • The ability to predict a borrower’s future actions based on past credit patterns.

Borrowers who have made payments on previous and current obligations in a timely manner represent a reduced risk to the lender.

Conversely, if a borrower’s credit history, “despite adequate income to support obligations”, reflects continuous slow payments, judgments, and delinquent accounts, that means that in all likelihood, as the FHA and HUD official site reminds, “significant compensating factors will be necessary to approve the loan”.

These compensating factors may include a bigger down payment (10% as opposed to the 3.5% offered to those with better FICO scores).

With regard to co-signing or having what FHA loan rules call “contingent liability” on someone else’s loan, FHA loan rules indicate that “A contingent liability exists when an individual is held responsible for payment of a debt if another party, jointly or severally obligated, defaults on the payment.”

With that in mind, HUD 4000.1 says the lender will include such co-signing liabilities when deciding to approve or deny the mortgage.

Co-signers on car loans, student loans, mortgages, and other large obligations may learn these are considered as part of the credit risk assessment.

If the lender obtains “documented proof that the primary obligor has been making regular payments during the previous 12 months, and does not have a history of delinquent payments on the loan during that time”, the lender may choose not to include the co-signor obligation in the applicant’s list of financial obligations.

But you will need to discuss this issue with the lender as standards will vary depending on the financial institution.

As stated above, much depends on how the debt has been handled, and the lender can exercise some judgment in processing the loan with this information in mind. Lender standards may apply and could be more strict than the FHA loan rules here.


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