One of the more beautiful sayings in Spanish in my opinion is “Mi casa es su casa.” That translates to “My house is your house.”
That sentiment has a lot to do with the intention behind community property laws. Nine states have laws that say things you buy when you’re married become property of the couple. Depending upon the type of loan you get, this can affect your application for a mortgage. If you can’t make the monthly payment, your spouse may still be responsible for the payments regardless of whether they’re on the loan.
If you’re considering applying without your spouse, there may be cases where it still makes sense to do so. Let’s look at some considerations.
Where and When Does It Apply?
The first thing to figure out is whether community property applies in your state. The following nine states have communal property laws on the books that apply to married couples:
- New Mexico
Residents of Alaska also have the option of creating community property estates, but it’s not required that they do so.
There’s another huge caveat to the community property guidelines I’m about to go over:
The following rules concerning debt and credit only apply in the case of FHA and VA loans. If you get your loan through Fannie Mae or Freddie Mac, those loans follow traditional guidelines and the debt and credit of your non-borrowing spouse isn’t factored into the loan.
My Debt Is Your Debt
In those states where community property is in effect, a lender is required to request a credit report from the non-borrowing spouse when doing an FHA or VA loan. Investor guidelines on these particular loans require them to consider a number of factors that could impact approval.
Debt-to-income (DTI) Ratio
Lenders need to consider this because a borrower’s debt has to be figured into the qualifying debt-to-income (DTI) ratio. Let’s do a quick example on how DTI is calculated.
Let’s say I make $3,000 a month. My car payment is $300. Housing is $700 and I have a credit card bill of around $300 per month. My DTI is 43% ($1,400/$3,000).
On FHA and VA loans in community property states, spousal debts are included in DTI regardless of whether the spouse is on the loan.
Charge-offs and Collections
Charge-offs and collections on accounts occur when payments on debt are considered well past due and the creditor doesn’t think they are likely to collect. At that point, they’ll place a mark on your credit report. Although you can’t fully remove accounts that have been charged off or gone into collection from your credit report for seven years, you can pay them off in full or sometimes work out a payment plan to deal with the obligations.
If your spouse has charge-offs or collections to pay off, they may affect your DTI. This is true for certain FHA and VA loans. One thing to note is that if the collections are in the name of your spouse, you may not have to wait 12 months prior to applying in order to get a VA loan. The collections just need to be paid off at closing.
Judgments and Liens
If your spouse has judgments or property liens, those can also affect your ability to close a loan and, in some instances, are required to be paid off. Exactly how it works depends on the type of loan you’re getting.
You’re probably wondering at this point why you would bother applying alone in a community property state if your spouse’s debt and credit report are taken into account anyway?
While your spouse’s credit report has to be ordered on FHA and VA loans to take a look at the debts, the credit score is not taken into account. This means you can’t be denied for a mortgage if your spouse has a bad credit score. In contrast, if you apply together, all scores are taken into account for both clients.
We hope this has cleared up some of the factors involved in applying for a mortgage in community property states, but a lot of this depends on the specific type of loan you’re getting. If you still have questions, call us at (800) 251-9080. You can also leave your questions in the comments and we’ll answer them or get them to the right people.
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