Mortgage, Community Property State, and the Non-Purchasing Spouse: What You Need to Know

When applying for a government insured mortgage, like an FHA, VA, or USDA loan, home buyers in California are often shocked to hear their non-purchasing/non-borrowing spouse’s debts will count against themWhy are they shocked? Because they didn’t know about this in advance…..I know, that was too simple:-)  The real shocking part comes when they find out how much less they qualify for with the the non-borrowing spouses debt factored into the qualifying ratios. 

But better to now than later, right?

Just last week two home buyers walked into a bar…….OK OK not quite, but they called me about a down payment assistance program and told me another lender pre-approved them for an FHA loans at $200,000.  Both had even made offers on a few homes already.  I tell them about the assistance program, they’re interested, so they send over their qualifying documentation.  I ask for their non-borrowing spouses social security number in order to determine and  disclose their legal liabilities.  They ask “Why do you need that? (in a suspicious disgruntled voice) The other lender didn’t ask for that!”

Yikes… I explain about California being a community property state, FHA, VA, and USDA loan guidelines, and the need to count the spouses debts in the qualifying ratios.  We run the spouses credit report and non-borrowing spouses had her own car loans and credit cards and the other spouse short sold a home 12 months ago!  I calculate qualifying income with all debts for the one couple and WHAMO, like a kick to the crotch, their qualifying amount drops to the low $100,000 range.

The other borrowers spouse who had a short sale last year presents a whole other set of complications that I don’t have time or space to discuss right now… call me at (951) 215-6119 if you or your spouse are trying to figure out how to purchase a home after having experienced a recent short sale or foreclosure.

Why didn’t the other lender ask them for this info? I have no idea……and don’t even want to speculate.  But I will admit, the very first time I originated an FHA loan back in 2007, I made this error and didn’t realize this until 7 days into escrow.  Fortunately, I lucked out and the buyer still qualified with the spouses debts.

Don’t worry, the non-borrowing spouse’s actual FICO credit score or credit history is not considered a reason to deny a loan.  It’s only purpose is to establish the borrowers legal liabilities when buying in a community property state.

When planning to by a home, I realize many people purposely put debts in one spouses name in order to avoid the debts from counting, but later get blindsided when this happens at loan application…..or worse, while in contract to buy a home.  That is why it’s so important to speak with an experienced mortgage professional before any strategic maneuvering/transferring of debt or major purchases are made.

The only time a non-borrowing spouses credit history will not count against the primary borrower/buyer, in a community property state, is when the short sale, foreclosure or bankruptcy occurred before your marriage.

That is why couples engaged to be married may want to consider buying a home before getting married.

If you have other questions about qualifying for a mortgage, call me at (951) 215-6119 or send me an email brad(at)homeloanartist(dot)com.

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