My wife was entering her third and final year of law school when we bought our current home. While she landed a nearly full ride to a Top 20 school, after two years of nonstop studying, her debt and income profile didn’t exactly glisten in terms of mortgage qualification.
In fact, it might have proved detrimental. Some lawyers may make good money, but most law students aren’t exactly raking it in. Adding her to a loan application would have meant a net loss because her minimal debt exceeded her even more minimal income. It ultimately made more sense for me to qualify on my own.
For a lot of prospective homebuyers, being able to count a spouse’s income is essential to qualifying for a loan. But there are certainly times when debts or bad credit actually make your spouse a homebuying liability.
The rub is that, depending on where you plan to purchase, your spouse’s rough financials can still hurt you, even if you leave him or her off the loan.
Welcome to life in one of the country’s nine community property states.
Community Property and Common Law
The roots of community property law reach back to the Roman Empire and beyond. At its most basic, community property is a legal framework for addressing the question of who owns what between a couple. The nine states currently recognizing community property are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
Married couples who purchase a home in a community property state usually own it jointly, regardless of whose name is on the mortgage. That’s different from the common law approach to property most of the country recognizes. Under common law, you own what you own, to put it plainly.
With community property, a spouse whose name isn’t on the loan still co-owns the house. That’s a potential cause for concern among mortgage lenders for a host of reasons. A big one is that a non-purchasing spouse’s money woes could lead to a lien being placed on the property.
To help hedge their risk, mortgage lenders can factor in a non-purchasing spouse’s credit and debts when evaluating a community property purchase. That often means both spouses need to financially prepare before starting the homebuying journey, regardless of who’s actually signing the paperwork.
In fact, one of the first things anyone who wants to buy a home should do is pull their credit reports and credit scores in order to have a thorough understanding of their credit. Consumers are entitled to pull their credit reports for free once a year from each of the three major credit reporting agencies. There are also online tools and services available that let you see your credit score for free (Credit.com is one company that offers a tool like this). This information can help a couple decide which paths to homeownership they can – or must – explore.
In practice, lenders can take different approaches on community property purchases. Some may focus on debts and any derogatory credit like collections or judgments, but pay little attention to a non-purchasing spouse’s credit score.
Collections or judgments will usually count against a lender’s derogatory credit cap, which puts a dollar limit on how much bad debt a loan file can have. Just the everyday debt will have an impact on the borrower’s overall debt-to-income ratio.
The good news is some mortgage lenders may be able to offset the debts of a non-purchasing spouse if they bring enough stable, reliable income to the picture. But that’s also not incredibly common, mostly because your spouse is probably going to be on the mortgage with you if he or she has enough income to at least cover their debt.
Be sure to ask lenders about their community property policies if you’re considering buying in one of those nine states. Know what you’re getting into at the outset to avoid wasting time and money chasing a loan for which your household isn’t quite ready.