Fannie Mae Guidelines On Community Property States

This BLOG On Fannie Mae Guidelines On Community Property States Was UPDATED On November 6th, 2018

Fannie Mae Guidelines On Community Property States On Non-Borrowing Spouses Debts:

Community property states are always a confusing topic for mortgage borrowers.

There are nine community property states in the United States:

Arizona
California
Louisiana
Texas
Idaho
Wisconsin
Washington
Nevada
New Mexico

Borrowers who live in the above states, this article will be informative. If you happen to reside in the community property state, what does this mean for your mortgage approval?

Fannie Mae Guidelines On Community Property States And What Is Community Property

This means that any property acquired during your legal marriage is equal property of both spouses.

Let’s dive into this in a little bit more detail
The idea of community property is inherited all the way back from a Roman derived civil law system
It has been adopted into Spanish law which made its way into Mexico’s ganancial community system over the years
Part of the reason most of the community property states are in the southwest region of the United States

How Home Buyers Are Affected Qualifying For Mortgage In Community Property States

Laws In Community Property States :

If you buy a house while married, you and your spouse own the property 50/50
This may not seem like an issue
But if the marriage terminates in later years, it can be difficult to sort out this community property issue
If the house is sold then this is very easy, you simply split the proceeds 50/50
But what happens when one spouse wants to keep the property?
This is when the community property can be an issue
Typically, a refinance is required (once the divorce is finalized)
One spouse pays the other spouse with the equity in the property
Of course, other arrangements can be made on a case-by-case basis through the divorce courts

Fannie Mae Guidelines On Community Property States Versus HUD Guidelines

The most common issues that arise within community property states, fall in the debt to income ratio issues.

For any mortgage borrower attempting to receive a government-backed mortgage, both spouses’ debts will be counted against the overall debt to income ratio
This holds true whether both spouses are on the mortgage loan or not
What is a government-backed mortgage?
This simply means an FHA, VA or USDA loan
An example of when this can become an issue is when one borrower of the married couple has a non-qualifying credit score

See below:

Mark and Jen are a married couple in the state of Texas
They are NOT first-time homebuyers
They sold their house a year ago and have been renting for a year
They now want to buy their next home
Mark has a score of 620 and Jen has a credit score of 578
Since Mark has a score of 620, he can qualify for a conventional loan or FHA loan
Jen, on the other hand, will only qualify for an FHA loan with 10% down payment
Her score is below 580 which is the threshold to only put down 3.5% as a down payment
Since Mark and Jen have a total of 5% save for the down payment, we cannot have Jen on the mortgage loan

At this point Mark has two choices:

Go forward with an FHA loan in just Mark’s name with 3.5% down payment and count both his debt and Jen’s debt against his overall debt to income ratio
Qualify for a conventional loan with 5% down payment and not count spousal debt against the overall debt to income ratio

Benefits Of Conventional Versus FHA Loans In Community Property States

Conventional loans do not require borrowers to count spousal debt against overall debt to income ratio in community property states.

Conventional loans are slightly harder to qualify for than an FHA loan based on credit requirements
The loan officers of Gustan Cho Associates are top-notch
The Gustan Cho Team will be able to explain both loan programs to you
If your combined debt to income ratio is holding you back from buying a house, it is a good idea to contact us and come up with a plan to use a conventional loan!

How Does Mortgage Process Work In Community Property States

How to start the process?

Gather the following document:

Last 60 Days Bank Statements – to source down payment
Driver’s License
Last 30 Days Pay Stubs
Last Two Years W2’S
Last Two Years Tax Returns

Call or email Mike Gracz at 630-659-7644 or text for faster response. Or email Michael at mgracz@gustancho.com. Mike will talk to borrowers about overall mortgage goals and qualifications. Then will be sent an application link to start the process. One of the experts of Gustan Cho Associates will get you pre-qualified or put you on a plan to qualify for your next home! Many loan officers struggle with the guidelines between “common law” and “community property” states. It will help you to work with an expert from start to finish. We look forward to helping you with your mortgage needs!