Buying a Home in Community Property States: What You Need to Know
The article covers buying a home in a community property state.
Buying and financing a home in a community property state is a little different if you’re a married couple. It’s important to understand these distinctions before you apply for a mortgage.
What Is a Community Property State?
A community property state has special rules for the way married couples allocate their property and their debts. This affects the way you take title on your home and can also impact your mortgage application.
In a community property state, assets or debts that the couple accumulates during their marriage belong equally to both parties. It’s harder to keep one spouse off of title or a loan application to qualify for financing.
The nine community property states in the US are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
Applying for a Mortgage in a Community Property State
Applying for a mortgage in a community property state can be a challenge if you need a government-backed loan to qualify for financing.
That’s because guidelines for FHA, VA and USDA home loans require lenders to consider the debts of both spouses, even if only one of them is applying for a home loan. They may also take the non-borrowing spouse’s credit into account when underwriting the loan.
However, conventional (non-government) lenders do not require a borrowing spouse to disclose the debts and credit history of the non-borrowing spouse. If you can qualify for financing without a government-backed home loan, borrowing in a community property state doesn’t present a problem.
Why Leave One Spouse Off the Mortgage Application?
Why would a couple only put one borrower on the home’s title or on the mortgage? Many couples choose to leave one spouse off of the loan if he or she has bad credit, as long as the income of the borrowing spouse is enough to qualify. That’s because mortgage lenders must use the lowest representative credit score when qualifying borrowers and pricing loans.
An applicant for a Fannie Mae mortgage who has a 740 FICO score will pay thousands less for the same loan than an applicant with a 640 FICO. So if the main earner in a marriage also has a higher credit score, it can make sense to leave the other spouse off the loan. It may even be necessary to leave a spouse off if his or her credit score is too low for loan eligibility.
Another reason for leaving one spouse off the loan is to improve the debt-to-income ratio. Ann and Bill are married. Ann works full-time, carries one credit card that she pays off every month, and she owns her car outright with no loans. Her husband, Bill, is in grad school and just started a part-time job. He has student loans, a couple of credit cards, and an auto loan. His debts are partially covered by a stipend from his school and money from his parents.
Qualifying would be a nightmare because Bill’s debts are high and underwriters may not be able to count his income. It makes sense for Ann to apply for a mortgage in her own name so that only her debts will be counted.
Government Loans in Community Property States
The reason that government-backed mortgages require underwriters to consider the debts of both spouses in community property states is to protect taxpayers.
Debts acquired by either spouse during the marriage are legally the responsibility of both spouses, and if the non-borrowing spouse fails to pay his or her debts, the borrowing spouse could be on the hook for them. And that could compromise the borrowing spouse’s ability to make the mortgage payment.
Underwriters for FHA, VA and USDA loans also examine the credit report of the non-borrowing spouse. The non-borrowing spouse’s credit scores don’t matter. But lenders look for debts that could increase the risk to the lender. For instance, collection accounts that might turn into lawsuits, judgments and liens could cause the application to be rejected.