Exclude borrower debt paid by others on FHLMC loans?

Off and on for the last few years I have been a volunteer financial coach at my church using the Financial Peace University program created by Dave Ramsey.   This is a fantastic program that provides all you need to know about how to keep a “peaceful” balance of money in your life.

One of the many lessons is about co-signing for debt.  To put it nicely I would say Dave Ramsey is opposed to co-sighing for debt.  If you go to YouTube and look him up, you will hear him say “Never ever never never never never never (I mean NEVER EVER) co-sign for someone else’s debt”.  Of course, he goes on to explain why this is a bad idea, and I would have to agree with him that when it goes wrong it goes very wrong!

But what if your borrower has helped some one to get a loan?  Perhaps a parent helping establish a credit score for their kids.  Or co-signing for that car loan for your best friend to help their family get good reliable transportation?

Will this affect my borrowers ability to get a loan?

The truth of the matter is yes.  Having co-signed debts may have an impact on your ability to get a mortgage.  For years loan officers have had to really work with a borrower to get approved when these debts pushed the borrower’s ratios over the maximum allowed.  This included tasks like getting a copy of the original note and making sure the borrower was only “second signature” on the debt in question.  Also getting evidence from the other party that they were making every payment for the last 12 months.  Over the years of underwriting I have had to deny many loans over excessive DTI due to debts that were not paid by the borrower to comply with guidelines.

Good news, there is a “little” bit of relief coming for these good Samaritans of credit!

FHLMC announced on Oct 18^th 2017 that this new guideline is currently optional but as of January 18, 2018 will become standard for “contingent liabilities”.  On announcement 2017-23 FHLMC stated the following:

It has become more common for Borrowers to receive help from others in making payments on their debts (e.g., Borrower’s parents making their student loan payments). To account for this, we are updating our requirements to permit installment, revolving and lease payments to be excluded from the monthly DTI ratio when a party other than the Borrower has been making timely payments on the debt for the most recent 12 months and certain other requirements are met.

In addition, we are updating our requirements for excluding Mortgage debt from the monthly DTI ratio when a party other than the Borrower has been making timely payments for the most recent 12 months.

In all cases, we are no longer requiring that the Borrower be a cosigner or guarantor on the excluded debt.

Guide impact: Section 5401.2

While the first few paragraphs do not change the old rule much at all, the part I underlined makes all the difference in new guidelines.  This new update now means that even if I take out a loan on my own that some one else pays, we can now exclude the debt with a good payment history (minimum of 12 months) AND the evidence of other party making those payments.  This was always hard to prove the borrower was only the co-signer OR if they did take out the debt alone that the other party was paying for the debt.

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