Contingent Liabilities Counting Against A Mortgage

August 31st, 2015

rules

Contingent liabilities are potential liabilities. For example, if a parent guarantees a child’s car loan, the parent has a contingent liability. If the child makes the car payments and pays off the loan, the parent will have no liability. If the child does not make the payments, the parent will have a liability. The same scenario would hold when one party co-signs a mortgage for another party. Having a liability like this show up on your credit report can count against you when qualifying for a mortgage. This is the case even if the car or home is not actually yours.

The guideline

Freddie Mac recently made some changes as to how they count contingent liabilities against a mortgage borrower. If the mortgage borrower is a co-signer/guarantor on a debt for another person, the lender must determine who actually makes the payments on the debt. They do this when deciding whether the contingent liability needs to be included in the debt ratio of the mortgage borrower or not.

How to have this debt not count against you

The lender must obtain documentation that timely payments are being made by someone other than the mortgage borrower. They do this by obtaining copies of canceled checks or a statement from the lender. If someone other than the mortgage borrower has been making the payments the contingent liability may be excluded from the mortgage borrower’s debt ratio. The payments would have to be paid on time for the most recent 12 months.

If the payments on the contingent liability have not been timely over the most recent 12 months the liability must be included in the debt ratio. Or, if the lender is unable to document that someone other than the mortgage borrower made the payments, then the debt will be included in the debt ratio.

The contingent liability may also be disregarded if:

  • The debt has been assigned to another party by court order. For example via a divorce decree. And,
  • The lender documents the order with a copy of the separation agreement and divorce decree, and documents the transfer of title.
  • This is helpful when people get divorced and a joint mortgage shows up on both parties’ credit reports. This helps as long as party #1 can show a divorce decree that there is a court order for party #2 to make the payments. As well as showing that title was transferred. Then even if party #1’s name is still on the mortgage it would not be counted against party #1 in their debt ratio for a new mortgage.

Restrictions may apply.

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Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.

2 Responses to “Contingent Liabilities Counting Against A Mortgage”

  1. Karo Makserejian says:

    Does a contingent liability being excluded from dti with 12 months proof of payment restart if the loan is refinanced

  2. brianm says:

    If there is a refinance, you’d still need to document a contingent liability with 12 months proof of payment to exclude it from DTI.

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