Co-Signing on Debts for Other People
Here is a variation on a common question/concern held by many soon-to-be FHA home loan applicants:
"My credit is good but I am the co-signer on an auto loan. Will that hinder the bank’s decision to approve my FHA home loan? I do not make the payments on the vehicle.”
According to the FHA loan rulebook, HUD 4155.1, we learn in Chapter Four Section C about the FHA’s stance on borrower credit history in general and co-signing on other debt in particular. The general viewpoint of the FHA on credit includes the following:
“Past credit performance is the most useful guide to
- determining a borrower’s attitude toward credit obligations, and
- predicting a borrower’s future actions.”
Chapter Four also states, “Borrowers who have made payments on previous and current obligations in a timely manner represent a reduced risk. Conversely, if a borrower’s credit history, despite adequate income to support obligations, reflects continuous slow payments, judgments, and delinquent accounts, significant compensating factors will be necessary to approve the loan.”
Co-signing on a loan is known as having a “contingent liability”. Chapter Four says this is recognized by the participating FHA lender when, “an individual is held responsible for payment of a debt if another party, jointly or severally obligated, defaults on the payment.”
What does Chapter Four say about how the lender is to handle such liability when doing the credit review? Contingent liability applies, and the debt must be included in the underwriting analysis, if an individual applying for an FHA-insured mortgage is a cosigner/co-obligor on a:
- car loan
- student loan
- mortgage, or
- any other obligation.
There is good news for borrowers in this area; “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 payment does not have to be included in the borrower’s monthly obligations.”
As you can guess, the lender does have some leeway here to use discretion depending on the circumstances. Much depends on the borrower’s other financial qualifications.
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