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 an FHA mortgage assumption without the release of liability.

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

• the FHA mortgage lenders 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.

FHA MORTGAGE LENDERS REQUIRED DOCUMENTATION

• Mortgage Assumptions – The FHA mortgage lenders must obtain the agreement creating the contingent liability or assumption agreement and deed showing the 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 FHA mortgage lenders 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 FHA mortgage lenders 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