How are debts paid by another person considered?

A Contingent Liability refers to a liability that may result in the obligation to repay only when a specific event occurs. For example, a contingent liability exists when an individual can be held responsible for the repayment of a debt if another legally obligated party defaults on the payment. Contingent liabilities may include cosigner liabilities and liabilities resulting from a mortgage assumption without release of liability.

The Mortgagee must include monthly payments on contingent liabilities in the calculation of the Borrower’s monthly obligations unless:

• the Mortgagee verifies and documents that there is no possibility that the debt holder will pursue debt collection against the Borrower should the other party default; or

• the other legally obligated party has made 12 months of timely payments and does not have a history of delinquent payments on the loan.

REQUIRED DOCUMENTATION

• Mortgage Assumptions - The Mortgagee must obtain the agreement creating the contingent liability or assumption agreement and deed showing transfer of title out of the Borrower’s name (i.e., a release of liability).

• Cosigned Liabilities - If the cosigned liability is not included in the monthly obligation, the Mortgagee must obtain documentation to evidence that the other party to the debt has been making regular on-time payments during the previous 12 months.

• Court Ordered Divorce Decree - The Mortgagee must obtain a copy of the divorce decree ordering the spouse to make payments.

For additional information see Handbook 4000.1 II.A.4.b.iv(L) or II.A.5.a.iv(N) available at https://www.hud.gov/program_offices/administration/hudclips/handbooks/hsgh

All policy information contained in this knowledge base article is based upon the referenced HUD policy document. Any lending or insuring decisions should adhere to the specific information contained in that underlying policy document.


Topic Number: KA-04045