Federal Housing Administration rules in certain states can add a challenge for lower income couples with one spouse who has a credit issue, and a real estate group wants to remove that extra hurdle.
The concern lies in the fact that an option otherwise available to FHA borrowers, putting the loan in the name of one applicant, comes with an additional potential roadblock in community property states.
That origination-related challenge exists because Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin generally require debt and assets acquired after marriage to be split equally between the parties. That may make stakeholders like the FHA reluctant to ignore legal implications of having a nonborrowing spouse on the loan, particularly at a time when a rule change has caused a delinquency spike in older loans.
The Department of Housing and Urban Development had acknowledged an inquiry and was reviewing it at the time of this writing.
"The kicker is you can't use the income of the nonborrowing spouse. This can drastically affect your debt-to-income ratios," said Jeremy Schachter, an Arizona-based branch manager at Fairway Home Mortgage.
FHA loans have a cutoff for higher total debt ratios. This is typically up to a 43% backend DTI or 50% if there are offsetting factors such as a higher credit score and savings, according to Rocket Mortgage.
What spurred interest in a change?
The National Association of Real Estate Brokers, which recently has been gathering homebuyer feedback on a bus tour, issued a call for change to the rule after hearing growing concern about it, according to NAREB President Ashley Thomas III. Thomas also is the founder and CEO of a multistate mortgage brokerage, LA Top Broker.
"We as an association have identified this as a barrier. I think it's a concern that's more prevalent right now, so the impact of this particular rule is probably more glaring than in the past," said Thomas.
NAREB wants to align FHA's requirements with those of Fannie Mae and Freddie Mac, two large government-sponsored loan buyers currently held in conservatorship. GSE loans give single borrowers more leeway even in community property states, but lower-income borrowers generally find it more difficult to qualify for them.
"Fannie/Freddie typically require only the borrower's credit information; government loans require the additional steps to manage the DTI ratios for qualification," said Tiana Uribe, broker/owner at Tru Financial Services in California.
NAREB, the oldest minority trade association in the United States, has a particular interest in lifting the FHA restriction because Black households have received 12-15% of the mortgages the government insurer backs.
Broader trends have driven the call for change, including a K-shaped economy that has increasingly driven many low-income borrowers to consider a nonborrowing spouse option.
"We have a lot of support growing to change this particular guideline," Thomas said, noting that he's been talking to legislators about the issue and gotten some feedback he considers promising.
Borrowing considerations
Community property state rules for nonborrowing spouses pose challenges not only for FHA loans, a common gateway to ownership for low-income and first-time buyers, but also for loans the Department of Veterans Affairs partially guarantees.
"Whenever you have a government-backed mortgage program such as FHA or VA, being married in a community property state can make or break your loan approval if your spouse is not on the mortgage," Schachter said.
Even outside of community property states, married couples have a lot to consider when deciding whether to pursue a loan taken out only in one spouse's name.
More recently, nonborrowing spouses who are married at origination have been given some limited protections in the case of FHA reverse mortgages related to the ability to live in the home after the borrower's death. But that is not the case for all loans.
If both halves of the couple want to have more confidence they will have an ownership stake in the home if their spouse dies or there is a divorce, traditional coborrowing is a better option.
In situations where a couple in a community property state does decide a one-borrower loan is their best chance at homeownership, loan officers advise them to be aware of not only the aforementioned risks, but also the following procedural requirements and options.
Origination insights
Although the nonborrowing spouse's credit score may not be reason to deny an FHA loan applicant, a tri-merge credit report traditionally required for mortgages will still be needed for them in community property states because of the debt information it contains.
"Obtaining the debt information and pulling a tri-merge adds a separate cost" associated with the nonborrowing spouse, said Uribe.
If a nonborrowing spouse has other credit inquiries within 90 days of pulling a tri-merge for a home loan, they also may need to provide some additional information and documentation, she added.
"A letter of explanation is required to determine if new credit was obtained and not yet reflected on the report," Uribe said. "If debt was obtained, a statement with payment information is required."
Since the rules in community property states pertain specifically to equal ownership of debts after marriage, borrowers can potentially get an exclusion for those acquired beforehand.
"If the nonborrowing spouse obtained some debt prior to the marriage, a solution would be to get an attorney opinion letter stating that those debts were obtained before marriage," Schachter said. "That letter combined with a copy of the marriage license can be used to exclude the debts in the ratios of the borrowing spouse."
Uribe said the only other nonborrowing spouse debt exclusion she has run into in her work to date involved a situation where there was overlap because the couple involved shared the obligation.
"I haven't encountered excluding debt other than duplicate debt shared by the borrower and nonborrowing spouse," she said.
