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Having Debt Count Against You, When Someone Else Makes the Payment

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Mortgage and Lending with Mortgages in AZ, CA, CO, DE, FL, GA, IN, MD, MN, MT, NC, NJ, NV, OK, OR, PA, SC, SD, TN, TX, UT, VA, WI NMLS #138061 MMCD #1141

Having Debt Count Against You, When Someone Else Makes the Payment

 

 

**Update: As of May, 2017, Fannie Mae released updated guidance with regard to loans paid by an outside party --- for Conventional loans underwritten to Fannie Mae standards, if the lender can provide evidence that a non-borrowing party has made 12+ timely payments on a debt, that debt does NOT have to be counted against the borrower, regardless of whether or not the account is in their name.  See full announcement here.***

 

     In the world we live in, where the majority of people are in debt, the situation is becoming more & more common where people are trying to qualify for mortgage loans, but on their application, it appears they're in over their heads in debt, and therefore cannot qualify.  Then we find out that a bunch of debts shown are actually being paid by someone else.  So should theyexcluding debt from a mortgage count against a borrower if someone else is paying them?  More importantly, DO they count against the borrower in qualifying?

 

 

     The answer is the same as with so many other questions in the mortgage world - it depends.

 

 

     Overall, a lender wants to make certain of one thing on all accounts - that their lien position is not going to be jeopardized by any default of debt (this is why tax liens must be addressed before a mortgage can be obtained).  Some debts WILL be open to judgements, and therefore, a lender's lien position.  Other debts typically will not.  The TYPE of debt matters, as does the arrangement.  Is the borrower a primary borrower?  A cosigner?

 

 

Let's look at a few examples:

 

 

Scenario #1: Parents cosigned for their child's student loans.  Child is in school, and the loans are currently deferred, with an agreement between the parents and their child that once repayment begins, the child will be 100% responsible for the payments.

 

Does the debt count against the parents?

 

It sure does.  With no payment history to document anyone else making the payments, a lender will factor 100% of the student loan payments into the parents' debt-to-income ratios.

 

 

Scenario #2:  Mom cosigned for daughter's new car since daughter didn't have any credit.  Agreement is made between mom & daughter that daughter will make all payments.  24 months later, mom wants to buy a home.  

 

 

Will that car loan count against mom?

 

Maybe.  If daughter has a history of payments made on time, documented with bank statements or other financial documents that show a consistent payment history of the same dollar amount, chances are a lender can exclude that debt.  However, if payments have a history of delinquency, cancelled checks show varying amounts, or mom had to step in once or twice along the way to make a payment here & there for daughter, then the lender will count the debt against mom.  In these situations, lenders are looking for seasoning on the payment history, and consistency.

 

 

Scenario #3:  Daughter buys home for mom (who has credit too poor to qualify for a mortgage), and daughter is the only one on the mortgage & title, but doesn't live in the property.  Mom makes all mortgage payments, on time, for 48 months, and saves every bank statement and cancelled check along the way to document that she, in fact, is the one paying the mortgage.  After that 48 months, daughter wants to buy a home of her own.  

 

Will the mortgage mom's been paying count against daughter?

 

Yes.  Since mom is not on the loan, and the daughter was an individual borrower, the debt will count against her, regardless of where the daughter lives, whom is making payments, or for how long.  The daughter's best option would be to add mom to title, and wait the proper waiting period (6 or 12 months) before refinancing the mortgage into just mom's name.

 

 

     In the above scenarios, a couple of things become clear.  For one, to exclude a debt from someone's debt-to-income ratios, things need to be documented extensively.  Cancelled checks, bank statements, and letters of explanation are usually all required to show a satisfactory history of a debt being paid by someone else.  Also, only cosigned accounts are eligible.  If an individual has an account in only their name, then it does not matter who makes payments, that individual will be responsible in the eyes of a lender.

 

 

     It is entirely possible to exclude certain debts from a borrower's mortgage application, but only if we can document a history, a consistency, and the account is a cosigned account.  When cosigning an account, it's important to consider whether you'll be buying a home in the near future - most lenders will require at least 6, but more frequently, 12 months of evidence before excluding a debt from someones application.  

 

 

     This is also another reason why it's so very important to get pre-approved for a mortgage well in advance of looking at homes.  Getting your ducks in a row, ensuring anything that needs to be seasoned HAS been, and being aware of the documentation that will be required will all make the home buying or refinancing process far easier.  It could be the difference between home buying being a pleasant experience, or one headache after the other.

 

Posted by

John Meussner
NMLS ID #138061

It's more than a house - it's home.  So we offer a wide range of mortgage products at competitive prices to help our clients achieve financial security at home.  While we get great feedback on our prices and products, many clients say their favorite part of working with John Meussner & MasonMac is the level of service provided along the way.

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Comments (30)

Kathleen Daniels, Probate & Trust Specialist
KD Realty - 408.972.1822 - San Jose, CA
Probate Real Estate Services

John, I feel that well-intending people just don't think through the consequences of their "helping" others ... and how it can interfere with their ability to help their self when it comes to purchasing/financing.

Feb 19, 2016 12:02 AM
John Meussner

Yep, I partly blame creditors - they're all too willing to get people on the hook, and completely unwilling to explain potential consequences and ramifications - they leave people to find those out the hard way.

Feb 19, 2016 01:52 AM
Matthew O'Hare
Osterville, MA

Great post. It seems so obvious yet so many simply don't understand.

Feb 19, 2016 12:20 AM
John Meussner

Thanks Matthew, it can definitely get confusing for some folks.

Feb 19, 2016 01:51 AM
Margaret Kapranos
Berkshire Hathaway Home Services - Novato, CA
San Francisco Bay Area REALTOR. 415-608-5070

Thank you for such great information.  I'd like to repost your blog to my site.  Is this okay?

Feb 19, 2016 12:33 AM
John Meussner

Absolutely that would be fine, Margaret Kapranos , I'd only ask to have my name cited : )

Feb 19, 2016 01:51 AM
Margaret Kapranos

Yes, you are cited.  Thanks. Great post and keep them coming!

Feb 19, 2016 04:37 AM
Linda Metallo DiBenardo
RE/MAX Impact, Lockport, Illinois - Lockport, IL

Yep, could see how your scenarios easily can happen.   Family members don't expect to burned when they co-sign, but they do!

Feb 19, 2016 02:32 AM
Fred Griffin Florida Real Estate
Fred Griffin Real Estate - Tallahassee, FL
Licensed Florida Real Estate Broker

  Co-sign!   Be very, very careful before you co-sign, even for a son or daughter.  This blog explains why it can be detrimental to your credit.

Feb 19, 2016 05:05 AM
Athina Boukas
Virginia Capital Realty - Richmond, VA
Certified Residential Specialist (CRS)

Good reminder for borrowers. I didn't know that lenders may take into consideration payments for 6-12 months made by others to exclude the debt. But as others said, not all underwriters would accept this.

Feb 19, 2016 09:02 AM
Mike Cooper, Broker VA,WV
Cornerstone Business Group Inc - Winchester, VA
Your Neighborhood Real Estate Sales Pro

Great stuff, John. I had a mother who cosigned for her daughter's home purchase lose her own home purchase a few years ago because her daughter didn't make her payment on time the month of the closing. The week of the closing, the lender pulled the loan approval.

Feb 19, 2016 09:16 AM
Karen Fiddler, Broker/Owner
Karen Parsons-Fiddler, Broker 949-510-2395 - Mission Viejo, CA
Orange County & Lake Arrowhead, CA (949)510-2395

Ok, what about this? My son has a couple student loans in his name that I pay for each month. I could show probably 10 years worth of payments to him in the same amount of the loans each month? could he remove that from his debt for qualifying? Timely post he is ready to think about buying. 

Feb 19, 2016 09:52 AM
John Meussner

Hi Karen Fiddler, Broker/Owner !  Unfortunately, if it's only his name on the loan, he'd still be responsible for the debt when calculating his debt/income ratio.  If your name is on the loan as a cosigner, then we could exclude it.

Feb 24, 2016 06:57 AM
Joan Whitebook
BHG The Masiello Group - Nashua, NH
Consumer Focused Real Estate Services

These types of questions come up from time to time. Thanks for this post.  It is most informative.

Feb 19, 2016 11:50 AM
Praful Thakkar
LAER Realty Partners - Andover, MA
Andover, MA: Andover Luxury Homes For Sale

John Meussner - great examples of when a debt can be counted (or not counted) for new mortgage.

And feeling better now -- my children pay for their car loan - documented so I will be perhaps eligible for a re-fi....

Feb 19, 2016 01:57 PM
Kat Palmiotti
eXp Commercial, Referral Divison - Kalispell, MT
Helping your Montana dreams take root

Before reading the scenarios above, I thought, "of course it will count" but I do see now there may be some instances where a debt someone else is paying for might not count. That's why talking to a mortgage expert prior to house hunting is a must!

Feb 19, 2016 08:58 PM
Ari Taylor
Century 21 North Shore - Peabody, MA
Realtor with Century 21 North Shore!

Great info! Thank you for posting this!

Feb 19, 2016 10:56 PM
Jill Murty, Realtor - Orange County, CA
Movoto - Laguna Niguel, CA

Buyers often ask why they must be pre-approved for financing sooner than later.  These seemingly unimportant, but very important things are some of the reasons why.   

Feb 19, 2016 11:43 PM
Olga Simoncelli
Veritas Prime, LLC dba Veritas Prime Real Estate - New Fairfield, CT
CONSULTANT, Real Estate Services & Risk Management

Good info  for buyers. Co-signers should also remember that guarantees are liabilities.

Feb 20, 2016 03:56 AM
Women of Westchester Working Together
Women of Westchester Working Together - West Harrison, NY
Women helping Women get ahead

John - As usual, this is great advice. You are so right about starting the process early. You then have time to address these sorts of issues.

Feb 20, 2016 07:48 AM
Nina Hollander, Broker
Coldwell Banker Realty - Charlotte, NC
Your Greater Charlotte Realtor

Hi John... great explanation. In their enthusiasm to help a parent or child, people often forget how this could cost them on their own credit.

Feb 20, 2016 08:48 PM
Kelly Turbeville
Keller Williams - Lake Forest, CA
Turning Real Estate Dreams into Reality

Hi John, thanks for the post.  Great reminders for all parties..

Feb 21, 2016 02:43 AM
Laura Cerrano
Feng Shui Manhattan Long Island - Locust Valley, NY
Certified Feng Shui Expert, Speaker & Researcher

That could easily happen with that type of debt but always needs to be addressed before it's too late.

Feb 23, 2016 03:47 PM
Laura Cerrano
Feng Shui Manhattan Long Island - Locust Valley, NY
Certified Feng Shui Expert, Speaker & Researcher

From what you guys are saying this is probably a common occurrence with a lot of your clients.

Feb 23, 2016 03:47 PM
Tammy Lankford,
Lane Realty Eatonton, GA Lake Sinclair, Milledgeville, 706-485-9668 - Eatonton, GA
Broker GA Lake Sinclair/Eatonton/Milledgeville

I have had some undocumented loans of this nature.  Bank of parents. :)

Feb 25, 2016 11:59 AM