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This guide covers buying house in community property states. Buying house in community property states can be tricky on certain loan programs. Thousands of Americans live in a community property state and may not understand how this can impact buying a home until they apply for a mortgage. In community property states, each spouse has equal ownership of the property. This blog will detail what it means to be a community property state. We will also discuss how buying house in community property states affects your mortgage loan approval. We will also cover how to apply for a mortgage buying a house in community property states with Gustan Cho Associates.

What States Are Homebuyers With High DTI Affected Buying House In Community Property States

What is a community property state? Marital property purchased while married in a community property state is owned by both spouses equally, 50% / 50%. Marital Property includes wages earned while married, all property bought while married, and all debts that occurred during the marriage. Marital property in a community property state begins at marriage and ends if a couple physically separates to complete a divorce. So, any earnings after separation are not community property.

Asset Distribution In Community Property States

An asset acquired before the marriage is considered “separate property” and is solely owned by that person. If so chosen, a spouse can transfer the title of their separate property into dual ownership as community property. For example, the money in a bank account before marriage can become community property if you add your spouse to the bank account as an account holder.

Within a community property state, separate property can include property owned by one spouse before marriage, property given to just one spouse during the marriage, or property inherited by just one spouse.

Community property will always include money either spouse earned during the marriage. However, things earned before the marriage will belong to the spouse who had it before marriage. Assets and money earned during marriage will be joint property.

Negatives Buying House In Community Property States

During a healthy marriage, community property is not a big deal.  It can be an issue during divorce and property distribution upon death. When a spouse passes before their partner, the community property is automatically deeded to the surviving spouse, avoiding court proceedings. Any community property is divided evenly 50% / 50% between each spouse during divorce or separation.

What States Are Community Property States

What states practice community property?

• Wisconsin
• New Mexico
• Nevada
• Idaho
• Washington
• Texas
• California
• Arizona
• Louisiana
• Alaska (when requested)

How does living in a community property state affect your mortgage qualifications?

How To Get Approved For a Mortgage With High DTI Buying House In Community Property States

If you are legally married within a community property state, you must know a few key points before purchasing a property. Residing within a community property state will require credit verification for any non-borrowing spouse on a government-backed mortgage.

A government-back mortgage includes USDA, FHA, and VA mortgage loans—these government-backed mortgages hedge risk by factoring in non-borrowing spouses’ debt when evaluating mortgage qualifications.

In short, your debts will count against the overall debt-to-income ratio even if you are not on a mortgage loan. If you are not on a mortgage loan, your income will not count toward the debt-to-income ratio. The thought process behind adding spousal debts is to negate any future financial woes, such as a judgment being placed against the property for the non-borrowing spouse. 

Debts Included In DTI Buying House In Community Property States

ALL Non-borrowing spousal debts are included in the debt-to-income ratio. This includes any mortgage debt, credit card debt, personal loans, auto loans, collection accounts (non-medical), and judgments. Any items reporting to credit and any judgments / public records (tax liens). 

Credit Scores Used By Mortgage Lenders

It is important to understand that the credit score of the non-borrowing spouse does not affect mortgage qualifications. The credit score is not taking into account, the minimum payments due are taken into account. So even if the non-borrowing spouse has a horrible credit profile, you may still qualify for the mortgage. 

Buying House in Community Property States With Non-Borrowing Spouse

It is also important to understand that the non-borrowing spouse’s credit profile will NOT be considered for a conventional mortgage. That is the only workaround if your debt-to-income ratio does not work when adding spousal debt on a government-backed loan. Gustan Cho Associates are experts in all FANNIE MAE and FREDDIE MAC mortgages. We offer all of their specialty loan programs and do not have any additional LENDER OVERLAYS. 

Qualifying For a Mortgage Buying House in Community Property States

How to apply for a mortgage with Gustan Cho Associates: First, gather the following documentation (for all persons on the loan application):

• Last 60 Days Bank Statements – to source down payment
• Last 30 Days Pay Stubs
• Last Two Years W2’S
• Driver’s License
• Last Two Years’ Tax Returns (not always required)

Once you have gathered your income and asset documentation, contact Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. After your one-on-one mortgage consultation with Mike, you will receive an application link to complete online. This will permit your loan officer to verify your credit profile and start your pre-approval. Of course, if you are located in a community property state and using a USDA, VA, or FHA mortgage, we will need your spouse’s information and pull their credit. “Community property” may sound simple, but there are still loan officers out there who do not understand the concept. Gustan Cho Associates pride itself on being current on all mortgage guidelines. Please stay tuned to our blogs for future announcements regarding guideline changes for 2024.

We look forward to hearing from you with any mortgage questions.