Community Property States Mortgage Guidelines On DTI

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This BLOG On Community Property States Mortgage Guidelines On DTI Was UPDATED And PUBLISHED On March 23rd, 2020

What are the guidelines for a mortgage on Community real estate regarding DTI

Community Property States

Marital property can be incredibly confusing.

  • Who owns what during a marriage, after a divorce, or after a spouse’s death can be a gray area
  • It will also depend on what state you live in as marital property laws vary from state-to-state
  • In this blog, we are going to focus on community property States
  • Keep in mind most states are common law states
  • On non-community property states means property acquired by one member of the married couple can be owned solely by that person
  • Community property States are mostly located in the Southern and Western areas of the United States
  • There are nine community property states in the United States
  • We will focus on Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin in this blog
  • These are the states that are community property in the year 2018

What Is Community Property

The basic definition of community property is anything you earn or purchase while married is owned by both parties of the marriage equally.

  • This includes house is purchased while married
  • Also includes income and debts acquired while marriage
  • Includes even investment accounts
  • What you earn, spend, and save during the marriage is property of both spouses
  • An easy way to think of how a community property state works is the following:
    • during a divorce the state court will divide all marital assets 50/50 unless otherwise agreed upon
  • Upon the death of a spouse in a community property state, they’re surviving spouse will assume all the joint property

How Mortgage Processing And Approval Affected On Community Property States

Non-borrowing spouses debts are included in debt to income ratio calculations on FHA and VA Home Loans on community property states.

  • This means that even though the non-borrowing spouse is not on the mortgage loan, their debts are counted on main borrowers DTI Calculations
  • This holds true on FHA and VA Loans BUT NOT Conventional Loans
  • In cases where home buyers in community property states have a non-borrowing spouse with a lot of debt, they may need to go conventional or non-QM mortgages

Advantages Of Divorce Proceedings On Community Property States

What are the advantages of divorce proceedings in the states of community ownership

So this doesn’t sound too bad right?

  • Hopefully, divorce is not the first thing on your mind, but in many cases,  divorce can get ugly
  • Community property does help the division of 50/50 on assets
  • But how does community property affect your mortgage?
  • Within a community property State, even if your spouse is not going on the loan, his or her debts are included in your overall debt to income ratio

Case Scenario On Qualifying For Mortgage In Community Property States

Let’s go over an example on a case scenario in qualifying for a home loan in a community property state:

Brad and Mary are a married couple in the state of California:

  • They are ready to buy a home together in San Diego
  • They are looking to buy a $450,000 home with an FHA loan
  • The FHA loan limit in San Diego County is $649,750
  • This is a high balance section of the state
  • They have 3.5% saved for the down payment
  • They are now applying for a mortgage
  • Brad and Mary expected to both be on the mortgage together
  • When their loan officer verify their credit scores, Brad’s score was a 625 and Mary’s was a 575
  • The loan officer informed them to keep Mary on the mortgage, they would need a minimum of 10% down payment for an FHA loan with credit scores below 580

Brad’s debts

  • Student loans totaling $45,000 – FHA will take a $450 monthly payment (see FHA STUDENT LOAN BLOG)
  • Credit card $4,215 – minimum payment of $175
  • Auto loan $18,746 – monthly payment of $425
  • COLLECTION ACCOUNT for $575 – (5% will be used as a monthly payment against DTI) =$28.75

Mary’s debts

Student loan totaling $15,750 – FHA will use a monthly payment of $157.50

  • Credit card $1,257 – minimum payment of $54
  • Auto Loan – $12,748 – monthly payment of $278
  • COLLECTION ACCOUNT for $8,740 – (5% will be used as a monthly payment against DTI) = $437

Total debt for monthly DTI =$2005.25

  • Brad’s income = $94,000 annually or $7833.33 monthly
  • Mary’s income = $72,000 annually or $6,000 monthly

Remember Mary’s credit score is below 580:

  • She will not be able to be on the loan application
  • Since she is not on the loan application, her income cannot be counted
  • Her that will count against the overall debt to income ratio calculated above
  • At this point, Mary is still on the title to the property as this is a community property state

Since we do not have any lender overlays, and Brad’s score is above 620, the AUS findings will give an Approve/Eligible with back end DTI up to 56.9%.

  • This means all of their monthly obligations (including housing payment) need to be below $4457.16 or 56.9% of Brad’s total income ($7833.33)
  • Their total debts are $2005.25 leaving them with room for a $2454.91 mortgage payment (including taxes and insurance)
  • See AUS BLOG for more details for the automated underwriting system

Below is the guideline referenced in this blog.

Reference Guide To Outstanding Non-Medical Collections Guidelines

If the credit reports used in the TOTAL Mortgage Scorecard analysis show cumulative outstanding collection account balances of $2,000 or greater, the Mortgagee must:

  • verify that the debt is paid in full at the time of or prior to settlement using acceptable sources of funds;
  • verify that the Borrower has made payment arrangements with the creditor and include the monthly payment in the Borrower’s DTI; or
  • if a payment arrangement is not available, calculate the monthly payment using 5 percent of the outstanding balance of each collection and include the monthly payment in the Borrower’s DTI

Medical collections are exempt from the 5% rule. So are charged off accounts.

Collection Account Guidelines

What are the guidelines for the collection account

Collection accounts of a non-borrowing spouse in a community property state must be included in the $2,000 cumulative balance. It needs to be analyzed as part of the Borrower’s ability to pay all collection accounts unless excluded by state law.

  • Cited section is the most important
  • With an FHA loan with cumulative balances up collection accounts totaling above $2,000, you must take 5% of the total collection do as your monthly payment against overall debt to income ratio
  • If there are some heavy collection accounts from either yourself or your spouse, this can significantly impact your qualifications
  • We received many calls from borrowers in community property States who have questions about why their spouse’s debts are counted against their ratios
  • Any loan officers do not get the proper information up front. If you reside in a community property State, the loan officer should pull credit for both spouses during the initial application
  • If they do not, you’re only asking for problems down the road

Qualifying For Mortgage In Community Property States With Direct Lender With No Overlays

Gustan Cho Associates are experts in lending in community property States. This is a topic that many loan officers are not up-to-date on. If you have questions regarding community property, please reach out to me directly on 630-659-7644 or send me an email to mgracz@gustancho.com.

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