How to Qualify for a Home Loan in Community Property States

How to Qualify for a Home Loan in Community Property States

If you are married and applying for a home loan by yourself in a community property state, be ready: some loan programs and state laws may require lenders to include your spouse’s debts, even if your spouse is not applying. This is especially important for FHA, VA, and USDA loans.

While conventional loans from Fannie Mae or Freddie Mac usually look at your own finances, state laws and shared debts can still affect your approval.

Buying a home in a community property state can bring unexpected challenges. Even if your income and credit are good, your spouse’s debts—including ones you might not know about—can raise your debt-to-income ratio and affect your loan approval. You can apply for a mortgage alone, but some government loans still require lenders to check your spouse’s debts. That’s why it’s important to compare loan programs before deciding.

What Are Community Property States?

Community property states have statutes that determine how property, income, and debts acquired during marriage are classified and divided.

Mortgage Applicants Tend to Focus on One Question Above All Else:

• If my spouse is not applying for the mortgage, can my spouse’s debts affect how much I can borrow?
• In some cases, the answer is yes.
• The answer depends on the mortgage program, the kind of debt, where you and the property are located, and your state’s laws.

Which States Adopt Community Property Laws?

The Following Nine States Have Implemented a Community Property System:

• Arizona
• California
• Idaho
• Louisiana
• Nevada
• New Mexico
• Texas
• Washington
• Wisconsin
• Guam and Puerto Rico are in the same group of community property states.
• The IRS has situated elective community property systems in South Dakota, Alaska, and Tennessee, but these systems are not the same as the traditional nine community property states.
• Prospective borrowers should be aware that community property laws vary by state.
• The IRS recommends reviewing your specific state’s laws for detailed guidance.

Puerto Rico is a Community Property State.

In Alaska, an optional community property system is in place. With qualifying agreements or trusts, married couples can create community property in Alaska, unlike the other states, where the traditional community property system automatically applies to all married couples. In South Dakota and Tennessee, elective forms of community property arrangements are available. Borrowers involved in elective community property agreements or trusts are advised to have the documents reviewed by their lender, title professional, and, when appropriate, a qualified attorney.

Understanding Community Property and Separate Property

Community property typically consists of property acquired during the marriage and the title to which is not designated as separate property. Separate property generally consists of property that is owned prior to the marriage, as well as property that is received by one spouse as a gift or inheritance. The property classification is determined by state law.

When applying for a mortgage, don’t assume that having your name on an account, deed, or loan decides how that property or debt is classified.

Classifying separate property can get complicated when community money is used. For example, using shared income to pay for or improve property owned separately can create a right to be repaid or shared ownership, depending on state law. State laws may handle these differently. Sometimes, a spouse’s debts who is not applying are included in the mortgage review. This goes against the common belief that a spouse’s debts don’t matter if they aren’t applying for credit, which isn’t always true. Additional scrutiny may be required for the non-borrowing spouse in a community property state for some government-sponsored mortgage programs.

Why Does Marriage Have an Impact on Mortgage Qualification?

If a Spouse Has the Financial Means to Buy a Home on Their Own, That Spouse Most Likely Has:

– Good credit – Good job history – Job stability – A solid savings – No personal debt

The Other Spouse May Have:

• Significant student loans
• An auto loan
• Credit-card debt
• Personal loans
• Leaving your spouse off the mortgage application might fix credit score issues, but their debts can still affect your chances for FHA, VA, or USDA loans.
• It’s smart to check your marital status and your spouse’s finances early in the pre-qualification process, not just at closing.

The Effect of Community Property on Debt-to-Income Ratios

The debt-to-income (DTI) ratio is a measure that compares your monthly debts to your monthly income.

For Instance, if a Borrower Has a Monthly Income of $8,000, and Has an:

• Auto payment of $400
• A student loan with a payment of $200
• $100 in monthly credit-card debt
• A proposed monthly housing payment of $2,400

The DTI Would Be:

$8,000 / $3,100 = 38.75% Now, imagine the borrower has a spouse who is not applying but has $900 in debts, which must be counted toward the mortgage.

The DTI is calculated as follows:

$4,000 ÷ $8,000 = 50% The borrower’s income and debts remain the same; the difference is due to the inclusion of the non-borrowing spouse’s debts.

Does a Non-Borrowing Spouse’s Credit Score Affect Qualification?

Getting a spouse’s credit report is different from using their credit score to qualify for a loan. For some government programs, lenders may pull the non-borrowing spouse’s credit report to determine which debts must be included. This doesn’t mean your spouse becomes a borrower on the loan. USDA policies, for example, clarify that non-buying spouses’ debts are included in the applicant’s total debt ratio in community property states, unless state law says otherwise. The non-buying spouse’s credit report is also not a basis for a loan denial.

Is It Possible to Apply for a Mortgage as an Individual in a Community Property State?

Yes, being married doesn’t mean both spouses have to apply for the mortgage. HUD states that in community property states, a borrower’s spouse need not be an FHA borrower or co-signer, but the applicable mortgage and state laws must be satisfied. There are a number of factors that married individuals may rely on to apply for a mortgage individually.

When is the Case to Leave a Spouse Off the Mortgage?

One Spouse May Decide to Leave the Other Spouse Off a Mortgage for Many of the Following Reasons:

• There is one spouse with a stronger credit profile
• There is one spouse with enough income to afford the house
• That spouse has derogatory credit
• That spouse has a lot of other debt
• There is no benefit in including the other spouse in the mortgage
• The other spouse does not have strong enough credit to qualify for that loan

Only leave a spouse off the mortgage if it is genuinely the best choice for both of you—not just because one spouse has a better credit score.

• Yes, a spouse can be on the Title or Deed but not on the Mortgage.
• A spouse can also be on the mortgage but not on the title.
• Community property law can also create ownership rights.
• The IRS states that only the Title may carry relatively little weight in determining whether property is community or separate property.
• Borrowers may rely on the community property laws of the jurisdiction where they reside.

When Does a Non-Borrowing Spouse Sign Mortgage Documents?

Non-Borrowing Spouses Can Sign Mortgage Documents Related To:

• Mortgage or deed of trust
• Homestead rights
• Marital rights
• Property rights
• Title
• Community property interests
• In securing a certain title or security documents, a spouse does not become personally liable for the debt evidenced by the promissory note.
• What obligations a non-borrowing spouse may owe depends on the specific facts and circumstances, as well as the particular transaction.

Do Non-Borrowing Spouse’s Debts Count?

They May:

• This is one of the more noticeable contrasts between obtaining a loan in a community property state versus a non-community property state.
• The treatment will depend on the mortgage program.

What Non-Borrowing Spouse’s Debts Count?

Depending on the Loan Program and the Applicable Law, the Following Obligations May Be Considered:

• Auto loan
• Credit cards with a balance
• Student loans
• Installment loans
• Personal loans
• Child support
• Alimony
• Judgments
• Collection accounts
• Other debts
• The lender will look to the applicable agency and state law to see whether a particular debt is a spouse’s debt.

May Non-Borrowing Spouse’s Debts Be Excluded?

Yes, in some circumstances. Some government-sponsored mortgages allow state law to dictate whether a non-borrowing spouse’s debt must be included. In these instances, the lender may be required to obtain documentation.

Based on the Situation, an Underwriter May Request Any of the Following:

• Divorce decrees
• Separation agreements
• Court orders
• Proof for assuming debt
• Proof that another party makes payments
• State-law proof
• Legal documentation concerning the agreements of ownership and/or the liability
• Don’t assume a debt will be left out until your lender reviews the proof.

Can You Use the Non-Borrowing Spouse’s Income?

In most cases, the income used to qualify a borrower must be the income of a borrower who meets the requirements of the particular loan program. Usually, you can’t boost your borrowing power by using the income of a spouse who isn’t on the mortgage because of poor credit or other issues. If that income is essential to meet the borrowing requirements, that spouse will have to be added to the loan and meet the underwriting requirements.

FHA Loan Requirements for Community Property States

FHA loans help borrowers in community property states because they allow one spouse to remain off the loan. But lenders will still look at the debts of the spouse who is not applying. HUD clarifies that just because a borrower is married and lives in a community property state, that spouse does not have to become an FHA borrower or co-signer.

FHA Regulations for a Non-Borrowing Spouse

In a community property state for FHA loans, the lender must assess whether the non-borrowing spouse’s liabilities are required for the borrowing spouse’s loan qualification.

The Key Distinction is:

• The spouse may stay off the loan, but the spouse’s liabilities will be factored into the borrower’s DTI.
• This is especially critical if the spouse who is applying for the loan has no debt and is applying alone, while the other spouse has significant debt.

Does FHA Require a Non-Borrowing Spouse Credit Report?

To identify applicable liabilities, FHA underwriting may require the lender to contact the non-borrowing spouse. For this reason, borrowers should be prepared to provide their spouse’s information early in the process, not only at the end. This information is not used for loan qualification, but rather to determine which liabilities must be considered under FHA and community property guidelines.

Non-borrowing Spouse Debt Under FHA Rules

Suppose a Borrower Qualifies Based on Their Income Alone, with a Spouse Who Has the Following Debts:

• an automobile payment of $550
• a student loan payment of $300
• a total of $125 in credit card payments
• If FHA community property rules apply, the spouse’s debt will be considered in determining the borrower’s ability to repay the loan, resulting in a total of $975.
• This can make a big difference in whether your debt-to-income ratio is acceptable for the loan.

FHA Guidelines on Community Property State Collections

Collections require a more thorough analysis by FHA in Community Property States than simply stating that all collections must be cleared. HUD has specifically stated that when analyzing the collection accounts of a non-borrowing spouse in Community Property States, their collections must be analyzed to determine if FHA’s cumulative collection account standard has been satisfied. For applicable non-medical collection accounts with a cumulative balance of $2,000 or more, FHA offers the options of payoff, submission of a payment agreement that meets FHA’s requirements, or establishment of an enforceable payment plan.

VA Loan Guidelines in Community Property States

Community Property State VA loans also require further analysis where the veteran spouse is the only borrower. According to the VA Lenders Handbook, in community property states, the lender may request and consider information about a spouse, even if the spouse does not co-sign the loan.

How the VA Deals With a Non-Lending Spouse

A service member might still be able to obtain a VA loan if the spouse does not also become a borrower. Yet, the lender might still need information about the spouse and related community property laws, as applicable. When evaluating a loan application, VA underwriting considers a service member’s ability to pay obligations after the loan and other living expenses, rather than only looking at other debts or a credit score.

Non-Borrowing Spouse Obligations and VA Residual Income

In the VA lending process, significant weight is given to the community’s ability to pay ongoing community obligations. Hence, community property obligations might impact the service member’s loan application beyond a simple, mechanical DTI calculation. For VA financing, it is prudent to assess the non-borrowing spouse’s obligations so the lender can accurately evaluate the qualifying ratios and VA underwriting criteria.

Is it Possible for a Service Member to use a VA Loan Without Their Spouse?

In certain situations, yes. The fact of marriage does not imply that the spouse will become a co-borrower. Nevertheless, community property laws might require a lender to collect and assess information regarding the spouse.

USDA Loan Guidelines in Community Property States

Regarding a non-purchasing spouse (NPS), the USDA has specific requirements. USDA training materials state that the obligations of the non-purchasing spouse in a community property state will be included in the applicant’s total debt ratio unless they are excluded under state law. This is the case even if the non-purchasing spouse does not sign the note.

USDA Policies Regarding Non-Purchasing Spouse

In community property states, USDA requires the non-purchasing spouse’s financial obligations to be evaluated. USDA differentiates these obligations from the spouse’s personal creditworthiness. The agency’s instructions indicate that while the NPS debts are assessed and included in the total debt, the evaluation of the NPS credit history is not grounds to deny the applicant, as the spouse is not a signatory to the note. (Rural Development)

Impact of Spousal Debt on USDA Loan Eligibility

For example, assume the borrower is eligible for USDA financing based on his or her income, and the non-purchasing spouse has a debt obligation of $1,200 per month.

If these obligations must be considered under community property laws, they will negatively impact the total debt ratio and the borrower’s purchasing power.

That’s why, if you’re applying for a USDA loan, you should be ready to share your spouse’s debts at the beginning of the pre-approval process.

Is the Non-Borrowing Spouse’s Income Considered on a USDA Loan?

Do not conclude that a non-purchasing spouse’s income will be considered on the loan just because the non-purchasing spouse’s debts are evaluated. The lender must assess qualifying income in accordance with USDA program standards and separate the income needed to repay the mortgage from the other household income considered in the USDA eligibility determination.

Conventional Loan Guidelines in Community Property States

Conventional loans may differ from FHA, VA, and USDA loans in terms of qualifications. Fannie Mae’s DTI calculation considers qualifying monthly obligations and borrowers’ qualifying income. The Selling Guide mandates that lenders must determine which liabilities, if any, will impact the borrower’s ability to pay the mortgage. This means a conventional mortgage may be a suitable option if your spouse carries significant debt.

Fannie Mae Guidelines for Non-Borrowing Spouses

Fannie Mae mandates that a credit report be obtained for all loan applicants.  This contrasts with some government programs, which require evaluation of the non-borrowing spouse’s obligations in a community property state. However, this doesn’t mean you can ignore all of your spouse’s debts.  Joint obligations, debts for which the borrower is legally liable, accounts in which the borrower is an authorized user, court obligations, and other situations may need to be handled differently and may require additional consideration under Fannie Mae guidelines. For example, Fannie Mae guidelines state that an authorized-user tradeline may require consideration if the account owner is the spouse, and that it depends on the overall loan underwriting.

Freddie Mac Guidelines Regarding Non-Borrowing Spouses

Freddie Mac conventional financing also relies on borrowers’ qualifying income, debts, assets, and credit under the applicable Freddie Mac Guide. Submitting a non-borrowing spouse’s income in the application is not possible. The Home Possible guideline states that a spouse or household member not listed as a borrower is not considered qualifying income.

Does Conventional Financing Count a Non-Borrowing Spouse’s Debt?

With Conventional financing, there is no non-borrowing spouse community-property debt test, unlike FHA, VA, and USDA. Conventional financing requires an assessment of the borrower’s obligations and any other obligations in accordance with the applicable Fannie Mae or Freddie Mac guidelines.

That is Why the Safer Statement is Not:

• “Spouse debt is never a concern with Conventional loans.”

Instead:

• In Conventional mortgages, typically only the borrower’s qualifying liabilities are considered, whereas government loan programs require additional consideration of the spouse’s debt in Community Property States.

When a Conventional Loan May Be Better in a Community Property State

Conventional Financing Can be Considered When a Borrower Has:

• Strong credit
• Stable qualifying income
• Sufficient assets
• Acceptable DTI
• Sufficient funds for the required down payment and closing costs
• A non-borrowing spouse
• A non-borrowing spouse with significant individual debt
• Conventional loans are not always the best option; borrowers must still meet all standard requirements.
• A very effective step for married borrowers is comparing FHA and Conventional loans before selecting a loan program.
• The loan that is easiest to qualify for is not necessarily the one with the lowest down payment.

When FHA May Be the Better Mortgage Option

The FHA May Make the Most Sense When a Borrower Has:

• Less available to put down on a home
• Lower credit scores
• Credit issues
• A need for flexibility in FHA underwriting
• Difficulty in qualifying through the conventional process
• HUD allows up to a 90% LTV when the borrower has an FHA Minimum Decision Credit Score of 500-579.
• A borrower with a score of 580 or above may qualify for the FHA’s higher maximum financing, subject to other requirements.
• Other lenders may also establish their own requirements above those set by FHA.

When Conventional Financing May Be the Better Option

Conventional Financing May Be a Better Option When:

• A spouse can qualify on their own
• The borrower has better credit
• The non-borrowing spouse has a lot of debt
• The applicable community property laws for government loans would raise DTI significantly
• The borrower meets conventional requirements

Selecting the most appropriate loan involves more than simply comparing interest rates.

Consider the Following Factors:

• Monthly payment
• Mortgage Insurance
• Closing Costs
• DTI
• Reserves
• AUS findings
• Spouse obligations
• Long-term cost

How Non-Borrowing Spouse Debt Can Change the Decision

Consider a married borrower who makes $7,500 per month. Assume the borrower has $800 in monthly debt and a proposed $2,300 monthly mortgage payment.

Total Debt:

• $3,100

DTI:

• 41.3%

Assume the non-borrowing spouse has $900 of debt.

If the Chosen Government Program Mandates Including Those Obligations, the Totals Look Like This:

• Total debt = $4,000
• DTI = 53.3%

That same borrower could have vastly different underwriting results based on the mortgage program in question and which obligations are included.

Which Loan Program Has the Easiest Qualifications?

It depends. FHA may allow some leeway in certain instances based on credit score; however, conventional financing could be preferable if one spouse qualifies on their own and the non-borrowing spouse has considerable debt. For eligible veterans, VA offers considerable advantages, and USDA provides zero-down financing for eligible borrowers and properties in eligible rural areas. The best mortgage is the one that aligns with your overall financial situation, not simply the one with the most popular feature.

How Debt-to-Income Ratio Works in Community Property States

DTI is one of the more prominent metrics used to qualify a borrower for a mortgage, and there is no universal DTI threshold for a particular mortgage. In previous versions of this article, 43% was used as a generalized maximum for conforming. This is too broad based on the more current conventional guidelines.

How to Calculate Mortgage Debt-to-Income Ratio

To Calculate DTI, the Equation is as Follows:

• Total qualifying monthly obligations ÷ qualifying gross monthly income = DTI
• Monthly income: $10,000, Total monthly obligations including the proposed housing payment: $4,200, then DTI = 4,200 / 10,000 = 42%

Calculating the DTI is straightforward.

• The greater challenge is determining which income and debts are included in the calculation.

How Spouse Debt Can Raise Your DTI

Suppose a non-borrowing spouse mortgage program obligates an underwriter to include an additional $1,000 in spouse obligations.

The Total Obligations Are:

• $5,200

New DTI is:

• 52%

Just that change could be enough to affect your loan approval, as with most programs.

Conventional Mortgage and DTI

According to Fannie Mae’s Selling Guide, the total DTI of a manually underwritten loan typically caps at 36%. In some cases, the total DTI may reach 45%, given that specific credit scores and reserve calculations support that DTI. When a loan is underwritten through Desktop Underwriter, a DTI of 50% may be considered, subject to specific program requirements and underwriting findings. It’s not correct to say that all conventional loans have a 43% DTI limit.

FHA, VA, and USDA DTI

As a result of these different mortgage programs and their qualification standards, borrowers cannot assume that DTI calculations alone will secure an approval.

The Rest of the File Will Also Support the Decision, Such As:

• Credit history
• Proposed housing payment
• Income stability and employment
• Cash and/or liquid assets
• Loan type
• Underwriting findings from an Automated Underwriting System
• Manual underwriting requirements when applicable
• Community property obligations
• Property eligibility determination

Here’s a Real-World Example to Show How Community Property Can Affect Your Mortgage

One Spouse FHA Loan Application Example

• Consider a couple (Brad and Mary) who are buying a house in California.
• Brad has enough income to support the mortgage.
• Mary is not an FHA borrower, as Mary and Brad agreed that Brad’s credit and income support the application more.

For this example, assume Brad’s income is $7,800 per month.

Brad’s Qualifying Monthly Obligations Include:

• $425 auto loan
• $450 student loan
• $175 credit card
• Total before housing = $1,050

Brad and Mary estimate the new monthly housing payment will be $2,350.

If Mary Had No Obligations, Brad’s Monthly Obligations Would Total:

• $3,400
• DTI = 43.6%

Non-Borrowing Spouse Obligations Impacting DTI

Now, Assume Mary Has These Obligations:

• $300 auto loan
• $175 student loan
• $125 credit card
• Total = $600

If these obligations must be included in the FHA transaction, Brad’s monthly obligations total $4,000. His DTI is then calculated as 51.3%. But just looking at the DTI doesn’t tell you if the loan will meet FHA guidelines. The example illustrates how the obligations of a non-borrowing spouse significantly impact the mortgage qualification process.

Impact of Conventional Financing

If Brad meets the requirements for a conventional loan, the loan officer will be able to evaluate the scenario based on guidelines from Fannie Mae and Freddie Mac. Due to a lack of a government-loan non-borrowing spouse framework in conventional financing, Brad’s qualifying DTI may vary significantly depending on which debts he can legally and contractually be held accountable for. That’s why, if you live in a community property state, it is important to review all available loan options, as there may be more choices than initially expected.

Mortgage in a Community Property State?

When the borrower is married, and the spouse is not applying, community property transactions may require additional documentation. Collecting your documents early can help you avoid last-minute problems during underwriting.

Typical Mortgage Documents

Depending on the Borrower’s Employment and the Type of Income That is Being Verified, a Borrower May Be Asked to Submit Any Combination of the Following:

• a government-issued ID
• recent pay stubs
• the last two years of W-2s and 1099s
• tax returns
• bank or other asset statements
• Employment documentation
• Purchase contract
• Homeowners insurance information, if applicable
• other underwriting required documentation

You might not need to provide every Not all of these documents may be required in every case.

Depending on the Mortgage Program and the State, the Lender May Request:

• Non-borrowing spouse ID
• Credit authorization
• Credit info
• Monthly debt documentation
• Marital status documentation
• Closing/title docs

For USDA, guidance specifically states that, in community property states, a non-purchasing spouse’s debt will be considered unless a state law provides otherwise.

Divorce, Separation, and Support Documents

Underwriting May Request, if Applicable:

• Divorce Decree
• Separation Agreement
• Property Settlement Agreement
• Child Support Order
• Alimony Agreement
• Court Order
• Debt Responsibility Documentation

These documents help establish which debts you are responsible for.ain Debts To exclude certain debts, lenders may request documentation to support the exclusion.

Examples Include:

• Court Orders
• Divorce Decrees
• Proof of Payment by Other Party
• Payment History
• Canceled Checks
• Legal Documentation of Debt Responsibility

Fannie Mae, for instance, has requirements for debts assigned to another party by court order and for debts paid by another party.

How Community Property Laws Affect Homeownership and Title

Mortgage approval and property ownership are related but are not the same. A Borrower may qualify for a mortgage individually, but state marital-property laws will determine property ownership.

Acquiring a Property When Married

Collecting property together during a marriage in a community property state generally results in the property being community property unless it meets the qualifications for separate property under the appropriate statutes.

When assessing legal entitlement, do not rely solely on whose name appears on the purchase contract or mortgage. In community or separate property systems, property title does not always determine ownership rights.

The IRS provides that community property is property designated as such under the statutes and held in title by community members. If you have questions as to the vesting of a title, you should contact a title company, the closing attorney, or other qualified professionals who can provide guidance on the property laws in the state.

Spousal Participation in Property Transactions

In Some Situations, Your Spouse Will Have to Sign Documents Related to:

• Buying
• Selling
• Refinancing
• Encumbering
• Transferring title
• Waiving your marital or homestead rights
• State law will control.

Prenuptial and Postnuptial Contracts

Ownership of assets and their classification may be affected by prenuptial and postnuptial contracts. However, the mere existence of a contract does not mean lenders may automatically disregard their obligation. The lender must assess whether the contract would affect compliance with applicable mortgage requirements and state law. If you have concerns regarding the enforceability of a law or its applicability to your situation, consult a qualified attorney.

Separate Property May Include Certain Assets Such As:

• Owned prior to marriage
• Received as an independent gift
• Received as an inheritance
• Obtained post the dissolution of the marital community

State laws may affect these classifications, and mixing community and separate assets may complicate the analysis.

How Divorce Can Impact a Mortgage in a Community Property State

Divorce creates a new layer of issues, as dividing ownership of a house does not remove either spouse’s obligation on the mortgage.

Dividing Home Equity During Divorce

A divorce decree or property settlement may state how equity is divided amongst the spouses. This may not alter the mortgage lender’s rights. If both spouses signed the mortgage note, both spouses will remain liable for the mortgage in its current state, unless it is paid, refinanced, transferred to another person (with the lender’s permission), or modified with the lender’s consent.  

Removing a Spouse From the Mortgage

A refinance is one common way to remove a spouse from a mortgage after a divorce, as a divorce decree stating that one spouse is keeping the house does not remove the other spouse from the mortgage note.

Refinancing Mortgages After a Divorce

‘Refinancing’ might mean a few different things in the context of divorce.

If One Spouse Retains Possession of the Family Home and the Other is Removed from the Mortgage, Refinancing Might Involve:

• Paying off the existing mortgage
• Changing the existing terms of the mortgage
• Performing an equity buyout
• Obtaining financing in the name of the retaining spouse

The spouse who retains the home must be able to repay the new mortgage and meet the lender’s refinancing requirements.

Equity Buyout

Fannie Mae’s Selling Guide has a specific section that addresses property settlements and buyouts arising from a divorce, and the treatment of certain surviving mortgage obligations once one spouse’s equity is removed. The divorce settlement and the transfer of ownership will govern the restructuring of the refinanced mortgage, so the settlement must be reviewed to determine its structure.

Applying for a Mortgage in a Community Property State

Determining which debts are considered community obligations should not complicate the mortgage process. It is best to address this before underwriting begins.

Obtain a Good Faith Estimate Prior to Home Searches

A good-faith estimate should include more than just a credit score.

The Loan Officer Should Analyze:

• all sources of income
• employment and employer
• assets and liabilities
• credit score
• monthly debt obligations
• the loan program and estimated monthly payments
• marital status
• any non-borrowing spouse obligations

Identifying potential issues early allows more time to find the most suitable solution.

Assess Non-Borrowing Spouse Obligations Early

Do not wait until the last minute to determine whether your spouse’s debts will be included in your loan calculations.

An Additional Several-Hundred-Dollar Monthly Debt Payment May Likely Alter:

• Highest purchase price
• DTI
• Loan program selection
• Down payment amounts
• AUS results
• FHA, VA, and USDA borrowers require special consideration.

FHA, VA, USDA, and Conventional Loan Comparison

Do not select a loan program based on perceived prestige alone. Assess the true qualification standards of each program. FHA loans may be more suitable for one person of a married couple, while Conventional loans may be more appropriate for the other spouse. VA loans provide eligible veterans with an excellent financing option with many benefits, while USDA loans may be available to other eligible borrowers.

Income, Assets, and Credit Documentation

Be prompt in providing the requested documentation. Incomplete spouse documentation, cont. Provide requested documentation promptly can cause delays during the underwriting process. Declaration of obligations and credits during the application is preferred over a multitude of obligations discovered prior to closing.

Common Mortgage Mistakes in Community Property States

Many community property mortgage issues are easily avoidable.

Assuming Your Spouse’s Debt Will Not Count

This is by far the most common misconception. Leaving a spouse off an FHA, VA, or USDA loan does not remove the spouse’s obligations from the loan underwriting analysis.

Waiting Until Underwriting to Review Spouse Debt

A pre-approval should be sufficient to address this before the borrower enters into a purchase agreement.

Delaying Initiation of Underwriting

• Approved Purchase Prices may be Lowered
• Changes to the Loan Program may be Required
• Additional Documentation may be Required
• Application Process may be Delayed
• Mortgage may no longer be Available

Choosing an FHA Without an Alternative Conventional Loan

If a spouse has subpar credit, FHA may be a good loan option, but it should not be chosen as the first option if the other spouse can obtain a loan independently.

Confusing Mortgage Liability with Ownership of the Property

• Someone can be liable on a mortgage, but may not own a title interest in the property.
• Ownership interests in property can exist without liability on the mortgage.
• Changing the title to property or divorce will not release a person from liability on the mortgage.

Assuming All Community Property States will have the Same Laws

This will not be the case. Community property states will have significant differences in laws, as acknowledged by the IRS. State laws will also govern the requirements of a mortgage loan.

Final Thoughts on Obtaining a Loan in Community Property States

The appropriate loan program must be identified to avoid problems with a spouse’s obligations when obtaining a home loan in a Community Property State. Loans from FHA, VA, and USDA will have to consider spouse obligations in Community Property States, while Conventional loans will mostly consider the borrower’s liability. Choosing FHA or Conventional will not be the correct answer.

The Right Mortgage Depends on:

• Borrower credit
• Qualifying income
• Assets
• Down payment
• Non-borrowing spouse obligations
• DTI
• Property
• State law
• AUS findings
• Applicable agency requirements
• Not all debts belong to the borrower.
• People who were previously informed that they did not qualify due to a spouse’s debts may benefit from having their circumstances reviewed and may be eligible for various mortgage programs.

If you have any questions about a home loan in community property states or borrowers who need to qualify for loans with a lender with no overlays on government or conforming loans, please contact us at Gustan Cho Associates at 800-900-8569. Text us for a faster response. Or email us at gcho@gustancho.com . The team at Gustan Cho Associates is available 7 days a week, on evenings, weekends, and holidays.

FAQs on Getting Approved For Home Loan in Community Property States