Community Property States Can Complicate Your VA Loan Chances

Snow covered home

Lenders can count a non-purchasing spouse’s bad debts in community property states.

Update: Our guidelines have changed regarding a non-purchasing spouse’s credit history in a community property state. Currently, Veterans United doesn’t consider a non-purchasing spouse’s credit score or derogatory credit, including things like collections, foreclosures, bankruptcies, short sales and loan modifications. But we continue to consider the non-purchasing spouse’s debts and liabilities, along with judgments or liens.


 

When it comes time to purchase a home using your VA loan benefits, having a spouse on the mortgage with you can make all the difference. Lenders can count that additional income as long as it’s stable, reliable and likely to continue.

But they will also look at the purchasing spouse’s debts as well. In some cases, having a spouse with significant debt can do significant harm by driving up your debt-to-income ratio. If that’s the situation you’re facing, it may be best to proceed solo, even if that means seeking a lower loan amount because you can’t count your spouse’s income.

Unfortunately, veterans in nine states don’t have the option of simply forgetting their spouse’s debt. And that can make it difficult for some to qualify for a VA loan. Let’s take a closer look at how purchasing in a community property state can complicate the process.

Community Property States

The community property states are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. In these states, married couples who obtain property usually own it jointly, which means it would be divided upon divorce or other dissolution of the marriage. That adds a layer of potential concern for mortgage lenders, who would otherwise only be concerned with whose name is on the loan.

To counter that, lenders can count the debts of a spouse even if he or she isn’t going to be on the mortgage. So even if you have great credit and a healthy debt-to-income ratio, lenders will still take a long, hard look at your spouse’s financial profile. Whatever debts your spouse has will be counted when the lender calculates your DTI ratio. The VA generally wants borrowers to have a DTI ratio of 41 percent or less.

If your spouse has any derogatory debt like collections or judgments, that will likely be counted in the lender’s derogatory debt cap, which limits the amount of bad debt a borrower can have.

Clearing Up Debt

So is there any way around this for veterans in community property states?

Some VA lenders may be willing to offset the non-purchasing spouse’s debts if he or she has stable, reliable income that covers them with a little padding left over each month. This is possible but not all too common, mostly because spouses with enough income to cover their debts are typically added to the mortgage as a formal co-borrower.

If you live in one of these nine states and have a spouse with an unhealthy debt load, you may want to prioritize debt repayment and get those levels under control before pursuing a VA home loan.

Photo courtesy of chrstphre