This guide covers DTI calculations in community property states mortgage guidelines. DTI calculations in community property states are calculated differently than non-community property states. The spouse, even though they are not on the mortgage note, is taken into consideration. Community property states require that the debts of the spouse are also the responsibilities of both parties. This holds true even though the spouse is a non-borrowing spouse. Debts of the non-borrowing spouse are counted on DTI calculations in community property states.
Community property states mandate that whatever property and debts that a married couple has, both the assets and debts are equally theirs.
This is regardless if their names are attached to them or not. For example, if a husband purchases a home without the wife, the home the husband purchased also belongs to the wife. This holds true even if the wife did not know about it or had any financial interest in it. Same with debts. If a wife were to purchase a car and take out a car loan and default on the car loan she purchased, the creditor can go after the husband as well.
What Are The 9 Community Property States
In community property states, the calculation of debt-to-income (DTI) ratios for mortgage lending purposes follows specific guidelines due to the shared ownership of debts and assets between spouses. Here are some key considerations for DTI calculations in community property states. There are nine community property states in the United States: The nine community property states in the United States are the following:
- Arizona
- California
- Idaho
- Louisiana
- Nevada
- New Mexico
- Texas
- Washington
- Wisconsin
The state of Alaska is a state that is called an opt-in community property state which gives both husband and wife the option to make their properties a community property. All debts incurred by either spouse during the marriage are considered community debts, regardless of whose name is on the debt. These debts are included in the DTI calculation for both spouses. Talk to us about your enquiry about loan
Spousal Income DTI Calculations in Community Property States
In most cases, the combined income of both spouses is used in the DTI calculation, even if only one spouse is applying for the mortgage. If the non-purchasing spouse has significant separate debts, lenders may include a portion or all of those debts in the DTI calculation, even if that spouse is not on the mortgage loan.
DTI Calculations in Community Property States on Alimony and Child Support
Any court-ordered alimony or child support payments must be included in the DTI calculation as a recurring debt obligation. Some states, like California and Nevada, allow borrowers to exclude certain community debts from the DTI calculation if proper documentation is provided showing the other spouse is solely responsible for the debt.
Lenders may have additional overlays or guidelines for DTI calculations in community property states that are more conservative than state laws.
The goal of these guidelines is to provide lenders with a comprehensive view of the borrower’s overall debt obligations, considering the shared liability for community debts in these states. Accurate documentation of debts, income, and legal agreements (e.g., divorce decrees) is crucial for lenders to properly assess DTI ratios in community property states. It’s important to note that specific requirements may vary among lenders and loan programs, so consulting with a mortgage professional familiar with community property state laws is advisable.
Credit Scores and DTI Calculations in Community Property States
Again, the nine community property states in the United States are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Wisconsin, and Washington. In non-community property states, when a married couple purchases a home, the mortgage loan can just go under one spouse’s name.
Debts incurred before marriage or after legal separation are considered separate debts and are only included in the DTI calculation for the spouse who incurred them.
The other spouse’s credit nor income are not counted if the non-borrowing spouse does not go on the mortgage note. Only one spouse can go on the mortgage loan and both spouses can go on the title so the credit, credit scores, income, and debts of the non-borrowing spouse do not matter. However, in the 9 community property states, the non-borrowing spouse’s credit does not matter but the debts will count in the DTI calculations in community property states.
Case Scenario on How Lenders Qualify DTI Calculations in Community Property States
Here is the case scenario: For example, let’s take a case scenario here: John and Jane Smith are a married couple. Here are the credit and financials of Mr. and Mrs. Smith. John Smith is the borrower. John and Jane Smith are a married couple: They are planning on purchasing a home in the state of Texas, a community property state. John Smith works full time and Jane Smith is a stay at home mom with no income. John Smith has great credit but Jane Smith has bad credit and has outstanding unpaid collection accounts. John Smith, Middle Credit Score of 700 FICO. Total monthly debts of $1,000 per month. Makes $6,000 per month gross. Has no collection accounts and stellar payment history. Jane Smith, Middle Credit Score of 500 FICO: Total monthly debts of $500 per month. Outstanding non-medical collection accounts of $10,000. No income because Jane Smith is a stay at home mom.
Having Just One Spouse as Borrower in Community Property State Home Purchase
The proposed P.I.T.I. (principal, interest, taxes, insurance) payments of the new home are $1,000. Even though John Smith will be the sole person to go on the mortgage note. John Smith’s mortgage lender will need to pull Jane Smith’s credit. Also, need to go over Jane Smith’s liabilities on her credit report. The credit scores do not matter and the derogatory credit history does not matter. However, since Jane Smith has $10,000 in outstanding unpaid non-medical collection accounts, FHA Guidelines On Collection Accounts require the following:
- The borrower has outstanding unpaid non-medical collection accounts with an aggregate balance of more than $2,000 dollars
- Then lender needs to take 5% of the outstanding unpaid collection account balance and use that figure in DTI Calculations
- This holds true even though no payment needs to be made by the borrower
- In this particular case, 5% of the $10,000 non-medical collection account balance yields $500
- So $500 will be used as a monthly debt payment for John Smith
- In this case scenario, the monthly debts for John Smith will be his $1,000 per month in total monthly minimum payments
- Plus $500 per month of Jane’s Smith’s monthly debt obligations
Plus the 5% of the $10,000 outstanding unpaid non-medical collection account balance for total monthly expenses of $2,000 per month. Click here for purchase a community property state home
DTI Calculations in Community Property States
The proposed P.I.T.I. on the new home is proposed at $1,000 per month: So if you add the total monthly debt obligations of $2,000 per month. Plus the proposed P.I.T.I. of $1,000. The grand monthly debt payments for John Smith will be $3,000 per month. If you divide the $3,000 monthly total debts which include the new home P.I.T.I. And divide it by John Smith’s monthly gross income of $6,000. The debt to income ratio comes out to be 50% DTI. Since John Smith’s credit scores are over 620 FICO, the maximum back-end debt to income ratios permitted is 56.9% DTI. Therefore his 50% DTI meets the DTI Requirements. The maximum front-end debt to income ratio for borrowers with credit scores over 620 FICO is 46.9% DTI. The front end debt to income ratios is calculated by taking the P.I.T.I. or $1,000 and dividing it by the borrowers’ gross monthly income or $6,000 which yields 17% DTI which is lower than the 46.9% front end debt-to- income ratio maximum.
Choosing a Mortgage Company With No Lender Overlays
Borrowers looking for a mortgage lender with no lender overlays in community property states, please contact us at Gustan Cho Associates Mortgage Group at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. My team of loan officers and I are available 7 days a week, evenings, weekends, and holidays to take your phone calls or emails and answer any questions you may have. Gustan Cho Associates do not have any mortgage lender overlays. We just go off the automated findings of the Automated Underwriting System. The minimum credit score to qualify for a 3.5% down payment FHA home loan is 580 FICO credit scores. Borrowers do not have to pay off any outstanding collection accounts with us to qualify for an FHA loan. Charge-offs do not matter. More than 75% of our borrowers are folks who either could not qualify with a different mortgage lender due to their investor overlays or got a last-minute mortgage loan denial.
