This guide covers getting approved for a home loan in community property states. The article covers buying a home and getting qualified for a home loan in community property states. Buying and financing a home in a community property state is slightly different if you’re a married couple on a government-backed home loan in community property states. Dale Elenteny, a senior mortgage advisor at Gustan Cho Associates, explains how Fannie Mae and Freddie Mac do not count the debt-to-income ratio on a non-borrowing spouse for a conventional home loan in community property states:
An applicant for a Fannie Mae mortgage with 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.
It’s important to understand these distinctions before you apply for a mortgage. You can get a conventional home loan in community property states and not have the non-borrowing spouses’ debts count towards the debt-to-income ratio. However, that is not the case on government-backed loans such as FHA, VA, and USDA loans.
What Is a Community Property State?
A community property state has special rules for how married couples allocate their property and debts to a government-backed home loan in community property states. This affects how you take the title on your home and can also impact your mortgage application. In a community property state, the couple’s assets or debts accumulating 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. If you are applying for an FHA, VA, or USDA loan and are married, your spouse’s debts will count towards the debt-to-income ratio calculations of your home loan. This does not include conventional loans.
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 is applying for a home loan. They may also consider the non-borrowing spouse’s credit 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 Home Loan in Community Property States?
Why would a couple only put one borrower on the home’s title or the mortgage? Many couples choose to leave one spouse off the loan if he or she has bad credit, as long as the borrowing spouse’s income is enough to qualify. That’s because mortgage lenders must use the lowest representative credit score when qualifying borrowers and pricing loans.
Another reason for leaving one spouse off the loan is to improve the debt-to-income ratio. Both spouses can be on a home loan in community property states. However, if one spouse does not work but has debts, why include the non-working spouse on the loan and add to 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 has 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 be unable to count his income. It makes sense for Ann to apply for a mortgage in her name so that only her debts will be counted.
Guidelines on Government Home Loan 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. This is only on government-backed home loan in community property states. This does not include conventional loans. If you have a non-borrowing spouse with a lot of debts but no income and need to qualify for a home loan in community property states, you may want to go with conventional loans versus government-backed home loan, says Ronda Butts, a dually licensed realtor and loan officer at Gustan Cho Associates:
You can qualify for a conventional home loan in community property states and not have your non-borrowing spouses debts count towards your debt to income ratios. And that could compromise the borrowing spouse’s ability to make the mortgage payment. There are three different types of government-backed home loan in community property states: FHA, VA, and USDA loans.
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 rejection of the application.