Today’s world of mortgages is made up by two sorts of loans, government backed loans and government insured loans. Government insured loans are hugely popular. The FHA loan is the benchmark government loan appealing to many due to its flexible guidelines and lower down payment options. Here is one pitfall you need to know if you are married….
Unlike government backed loans such as Fannie Mae loans the FHA views married couples jointly. This means joint responsibility and joint liabilities. FHA loans require the lender pulls credit on the debt of the spouse even if the spouse is not on the mortgage. Let’s say you have a husband and wife scenario. Husband is on the loan and has a healthy credit score, manageable debts and a solid job. Spouse does not. So she is not on the mortgage application. Lender pulls his credit on both the husband and the wife in this scenario because the FHA requires it. If the wife has separate debt beyond the obligations of the anchor borrower, those obligations will be counted into the debt to income ratio.
This requirement has no bearing on the transaction being a refinance or purchase. The debt of the spouse will always count against the borrower even if they are not on the loan. The reason this can become problematic is because the debts of the spouse exceed the anchor borrowers, obligations that can drive up the debt to income ratio lowering borrowing power in the process. This could hurt one’s ability to perform on a purchase contract or forgo a refinance opportunity.
If you are single this requirement does not apply. If you are single, but engaged this requirement does not apply. When you become legally married is when the guideline kicks in and when the debt of both spouses is required for qualifying for the mortgage loan.
Mortgage tip: if one of the spouses is applying for a mortgage for another property in a sole and separate transaction, a quit claim deed at escrow is going to be required for the married spouse signing off on the transaction.
If you are married and plan to apply for an FHA loan, count on the lender looking at both yours and your spouse’s credit reports. If your spouse has credit that otherwise hurts the financial profile, consider changing loan programs such as switching from an FHA loan to a conventional loan. A conventional loan only requires 1.5 percent more in down payment than an FHA and does not have that requirement which may improve borrowing chances. If you are not married and plan to get married and you know what the financial picture of your spouse is, buy the house first, then tie the knot.
Scott Sheldon is a local mortgage lender, with a decade of experience helping consumers purchase and refinance primary homes second homes and investment properties. Learn more at www.sonomacountymortgages.com.