FHA loan rules for calculating a borrower’s debt to income ratio are found in HUD 4000.1. There’s an issue some borrowers face when applying for an FHA mortgage that involves whether or not a non-borrowing spouse’s financial data needs to be included in the debt ratio calculation.
This issue affects borrowers in states that have community property laws. Such laws govern how a legally married couple’s debts and other financial affairs are viewed in the context of the legal relationship. The debts and financial obligations incurred by legally married couples in these states are often shared regardless of who actually takes out the loan, applies for the credit card, etc.
So in these states, certain extra considerations are required of the lender in the home loan application process. If you apply for an FHA loan in community property states, you may be required to furnish debt information for a non-borrowing spouse. According to HUD 4000.1:
“Non-Borrowing Spouse Debt refers to debts owed by a spouse that are not owed by, or in the name of the Borrower”. That is the FHA definition, which informs the following guidelines and instructions to the lender found in HUD 4000.1, page 180:
“If the Borrower resides in a community property state or the Property being insured is located in a community property state, debts of the non-borrowing spouse must be included in the Borrowers qualifying ratios, except for obligations specifically excluded by state law.”
Page 180 of HUD 4000.1 adds the following: “The non-borrowing spouses credit history is not considered a reason to deny a mortgage application”.
In such cases the lender is also required to verify the debts of the non-borrowing spouse, identify any of the debt that is excluded by law from being considered, and the lender must also pull the non-borrowing spouse’s credit report. Pulling the credit report, HUD 4000.1 states, is for one specific reason:
“The Mortgagee must obtain a credit report for the non-borrowing spouse in order to determine the debts that must be included in the liabilities. The credit report for the non-borrowing spouse is for the purpose of establishing debt only, and is not submitted to TOTAL Mortgage Scorecard for the purpose of credit evaluation. The credit report for the non-borrowing spouse may be traditional or non- traditional.”
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