June 3, 2011
When applying for an FHA home loan, the borrower is asked to list a variety of personal information including details about open lines of credit, car payments, any previous or current mortgages and other important details.
All this data is used by the lender to establish how much debt the borrower has, how adding an FHA mortgage commitment might affect the ability for the borrower to pay, and how much money is coming in versus how much is owed.
Good lenders know that debts and income are always changing–they are not fixed or constant. People pay off bills, credit cards and other obligations. They also open up new lines of credit, take on additional debt and increase their levels of financial responsibility.
That’s one reason why credit experts advise FHA loan applicants against opening new lines of credit when applying for a home loan–the potential for more debt could change the debt-to-income ratio, especially if the borrower overextends themselves with the new credit line.
Borrowers are asked to list their current debts in order to qualify for the loan, but what about debt that is nearly paid off? Does the FHA require you to report a student loan, for example, if that loan is within months of being paid off for good?
The FHA rules in this area don’t cover the debt itself as much as the impact it might have on the borrower’s finances once the loan is closed. FHA rules state, “Debts lasting less than ten months must be counted if the amount of the debt affects the borrower’s ability to make the mortgage payment during the months immediately after loan closing; this is especially true if the borrower will have limited or no cash assets after loan closing.”
The FHA won’t hold a nearly paid-off debt against you if that debt won’t affect your finances after closing time. If you’re within two or three months of paying off a student loan or credit card, you may be able to keep that obligation out of your debt-to-income ratio.
But when it comes to credit cards or other “renewable” lines of credit, you may need to close the account completely in order to make that happen. When in doubt, ask your lender what’s best–especially when it comes to credit cards or other credit that could be used again after the FHA mortgage loan is closed.
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.
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