Understanding the Differences in Debt Omission Requirements for Conventional and FHA Loans

When it comes to omitting a non-mortgage debt that another party is making payments on from the borrower’s debt-to-income (DTI) ratio, it’s important to understand the varying requirements set by conventional and FHA loans.

Both conventional and FHA loans require that the other party have 12 months of payments made in their name only. This means that if someone else is making payments on a debt on behalf of the borrower, it must be in their name for at least a year. This requirement ensures that the borrower’s DTI accurately reflects their financial obligations.

However, FHA loans have an additional requirement. In order to omit a non-mortgage debt from the borrower’s liabilities, FHA requires that the other party be on the note or agreement for that debt. This means that the other party must be legally bound to the debt in some way. If they are not listed on the note or agreement, the debt cannot be omitted from the borrower’s liabilities.

On the other hand, conventional loans do not have this requirement. As long as the other party has made 12 months of payments in their name only, the debt can be omitted from the borrower’s DTI ratio, regardless of whether they are listed on the note or agreement.

Understanding these differences is crucial for borrowers who are considering either a conventional or FHA loan. It’s important to consult with one of our mortgage professionals who can guide you through the specific requirements and help you make an informed decision.

While both conventional and FHA loans require 12 months of payments made in the other party’s name, FHA loans have an additional requirement of being listed on the note or agreement. Conventional loans, on the other hand, do not have this requirement. By understanding these differences, borrowers can navigate the loan process more effectively and make the best decision for their financial situation.

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