If you are married and applying for a VA loan in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington or Wisconsin, there is a surprise complication to the application process due to how marital property is held in these states. All the aforementioned states are community property states, as opposed to spousal states. In each, the VA spouse is treated differently on the mortgage. Read on to see the details of marital property can affect your application, and what you can do to prepare.
Community property is the principle that all the assets and (most) debts acquired during a marriage are split 50/50 between the spouses, even if the individual spouse was not the one who accrued the debt. Creditors can go after joint assets in a community property state no matter whose name is on the title document to the asset.
According to the VA, when applying for a VA loan in a community property state the lender must “obtain a credit report on the non-purchasing spouse in addition to the Veteran’s credit report, consider the spouse’s credit history in reaching a determination [, and] include the monthly payment of the non-purchasing spouse’s debts on the VA Form 26-6393.” These are not the only steps a VA lender must take in ascertaining a married couple’s creditworthiness in a community property state, but they are the most significant.
In practice, these requirements mean not only does your spouse have to sign all the legal documents, but they are also financially responsible for the mortgage. This applies even if they are not on the loan. It also means your spouse’s debt to income ratio (DTI) will be lumped with yours and the numbers considered in aggregate.
If you have stellar credit, but your spouse has struggled, their debts and liens will influence your loan rates and qualification. However, this isn’t the be all and end all. A veteran borrower with a satisfactory credit history may be considered an acceptable risk, even if their spouse is unsatisfactory.
In spousal states, the spouse must be included in signing documents acknowledging the loan. These documents usually include the Deed of Trust, the Right to Cancel, the Truth in Lending, and some title and settlement documents.
Even if your spouse signs these documents on the loan, they will not be financially responsible for the loan, unless they are included on the note. The mortgage note is the contract promising your property as security against the mortgage. It includes the rate of interest, terms of your loan payment due dates, and penalties and fees for not meeting your payment due dates or other terms of your loan.
Most significantly for the loan application process, under the Equal Credit Opportunity Act requests for, or consideration of, credit history and liability information of a spouse who will not be contractually obligated on the loan are prohibited. This means in a spousal state, the spouse’s DTI and credit history are not included in determining whether the married veteran applicant is qualified.
If you are in a community property state, there are some steps you and your spouse can take to prepare for the application process and receive the best terms. To lower DTI and improve credit history, collectively take these steps, at least, six months prior to beginning the application process:
- Pay bills on time.
- Consolidate debts and start paying them down, perhaps, by holding off on putting some funds into savings or retirement and redirecting them here for a season.
- Don’t make any large purchases that incur fresh debt.
- Don’t cancel or apply for any credit cards.
- Make a budget to decrease spending.
- Try to boost your income through side work or selling items.
At Arcus VA Mortgage, we specialize in VA loans and helping Veterans get the best terms possible. No matter where you and your spouse are credit-wise, we can advise you on how to get where you want to be. If you’d like to get more information on VA loans, or how your state’s marital property laws govern the process, contact us.