August 26, 2022
One of the most common questions we are asked about FHA mortgages involves state community property laws, non-borrowing spouses, and their credit issues. Does an FHA loan applicant have to include a non-borrowing spouse’s financial data when applying for an FHA mortgage?
It all depends on whether the state the borrower is living in has community property laws or not. In cases where such laws are present, the transaction may be affected. FHA loan rules on this topic are addressed in HUD 4000.1, starting on page 180. It begins with a definition:
“Non-Borrowing Spouse Debt refers to debts owed by a spouse that are not owed by, or in the name of the Borrower.”
In cases where a borrower lives in a community property state, where state law has a say in who is financially responsible for the debts of a legally married couple, the following applies:
“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.”
This section adds that the non-borrowing spouse’s credit history is not “considered a reason to deny a mortgage application” according to FHA loan rules. State law and lender standards may also factor into these circumstances, but in general, the FHA loan requirement includes the following:
“The Mortgagee must verify and document the debt of the non-borrowing spouse. The Mortgagee must make a note in the file referencing the specific state law that justifies the exclusion of any debt from consideration.”
The above means that your lender will be required to get 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 the TOTAL Mortgage Scorecard for the purpose of credit evaluation. “The credit report for the non-borrowing spouse may be traditional or non-traditional.”
Speak to a participating lender to see what may be required at that financial institution above and beyond what’s mentioned here.