Contingent Liabilities Counting Against A Mortgage

August 31st, 2015


A contingent liability is a potential liability. 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, even if the car or home is not actually yours.

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 when deciding whether the contingent liability needs to be included in the debt ratio of the mortgage borrower or not.

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

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

The contingent liability may also be disregarded and the documentation of the most recent 12 months’ payment history would not be required, if the obligation to make the payments on a debt of the mortgage borrower:

  • Has been assigned to another by court order, for example via a divorce decree, AND
  • The lender documents the order (provides appropriate pages from the separation agreement or 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. 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, 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.


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.

Leave a Reply