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.
• 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