Lenders must evaluate the liabilities (on-going debt) of any potential homebuyer under the Section 184 Program. This section outlines the basic requirements of such a review.
| a. | Recurring Obligations. The borrower’s liabilities include all installment loans, revolving charge accounts, real estate loans, alimony, child support, and all other continuing obligations. In computing the debt-to-income ratios, the lender must include the monthly housing expense and all other additional recurring charges, including payments on installment and revolving accounts extending 10 months or more, alimony, child support or separate maintenance payments. Debts of less than 10 months’ duration need not be counted unless the amount of the debt seriously affects the borrower’s ability to make the mortgage payment during the months immediately after loan closing. |
Revolving Accounts . If the account shown on the credit report has an outstanding balance, monthly payments for qualifying purposes must be calculated at the greater of 5 percent of the balance or $10 (unless the account shows a specific minimum monthly payment.
Alimony . Because of the tax consequences of alimony payments, the lender may choose to treat the monthly alimony obligation as a reduction from the borrower’s gross income rather than as a monthly obligation.
| b. | Contingent Liabilities. Contingent liabilities must be considered when assessing the borrower’s ability to repay the loan. A contingent liability exists when an individual would be held responsible for payment of a debt should another party jointly or severally obligated default on that payment. Unless the borrower can provide conclusive evidence that there is no possibility the debt holder will pursue debt collection against the borrower should the other party default, the following rules apply: |
| 1. | Co-signed obligations. If the borrower is a co-signer on a car loan, student loan, or any other obligation, contingent liability applies unless: |
| § | The borrower furnishes evidence showing the co-signer (i.e. the borrower) has not made payments on the loan over the past 12 months. A statement from both parties and cancelled checks showing the source of loan payments are acceptable evidence. |
| § | There was a divorce and the borrower’s ex-spouse was given the responsibility for payment of the obligation as part of a legal separation or divorce settlement. A copy of the separation agreement or the divorce decree is acceptable evidence. |
| 2. | Borrower/Co-Borrower on a Mortgage. Obligations on an outstanding HUD-insured, VA-guaranteed, or conventional mortgage secured by a property which has been sold or traded within the last five years without a release of liability, are considered a contingent liability unless: |
| § | There was a divorce and the borrower’s ex-spouse was awarded both the property and responsibility for payment of the mortgage as a part of the legal separation or divorce settlement. A copy of the separation agreement or divorce decree is acceptable evidence. |
| § | The borrower was transferred by his or her employer and is covered by a home sale guarantee plan. A copy of the relocation agreement is acceptable evidence. |
| § | An appraisal or closing statement from the sale of the property supports a value that results in a 75 percent loan to value ratio (i.e. the outstanding balance on the mortgage loan cannot exceed 75 percent of the appraised value or sales price). |
| § | The property sold had a HUD-insured mortgage and was sold to an owner occupant. Proof of this sale must be obtained. |
| c. | Projected Obligations. If a debt payment, such as a student loan, is scheduled to begin within 12 months of the mortgage loan closing, the lender must include the anticipated monthly obligation in the underwriting analysis. Similarly, balloon notes that come due within one year of loan closing must be considered. |
| d. | Obligations Not Considered Debt. Obligations that are not considered debt include federal, state and local taxes; FICA or other retirement contributions such as 401(k)s (including repayment of debt secured by these funds); child care costs; commuting costs; union dues; open accounts with zero balances; automatic deductions to savings accounts; and other voluntary deductions. |
