“You Have to Get Divorced to Get a Mortgage!”

by | Feb 5, 2021

The following came across my social media feed, on one of the mortgage loan originator groups, and I found it amusing:

Here's a first... I just had a conversation with a young client, who was advised by another loan officer to get divorced to close with an FHA loan and then get remarried! What an idiot of a loan officer! <profanity face> <profanity face> Who does that!?

It sparks some obvious questions, the answers to which some might find useful. The most obvious being, “why would someone be told they have to get divorced to get a mortgage!?”

The first answer to that is that we’ve never given that advice, worth noting. 

Keep reading for the more in depth answer.

When it comes to marital law, California is one of the 9 “community property” states in the union (here is a list of the others, from NOLO). This basically means that assets and liabilities are considered to be marital property. Assets and liabilities. The practical implication of that for a homebuyer is that even if only one spouse is buying the house and applying for a mortgage by themselves, in some cases we still must consider the other spouse’s debt obligations, as they appear on that other spouse’s credit report. But if that other spouse is not applying for the loan, that means we’re not able to consider that other spouse’s income! If we’re doing the math based on two sets of debt obligations, but only one income, it can skew the numbers against the mortgage applicant. 

What are the circumstances wherein the other spouse’s debts must be considered?

In the 9 community property states, the non-applicant spouse’s debts must be considered for government loans, such as FHA and VA loans. Where this typically comes up is scenarios where one spouse has bruised credit, which could negatively impact the interest rate if that spouse is part of the loan application. If one spouse has the income to support the desired mortgage on their own, and the other spouse is the one with bruised credit, the solution seems obvious: have that spouse with good credit and income apply for the loan by themselves! Be wary of out of state call center type lenders, they will often come to that conclusion, and stop there. This can lead to an 11th hour “surprise” when the underwriter starts adding up that other spouse’s liabilities on their credit report to make their “ability to repay the mortgage” determination, as mentioned above.

OK, so what’s the solution?

We already know the solution, you have to get divorced to get a mortgage! You put your Beyonce outfit on, you take a deep breath, you look your spouse in the eyes, and you simply state that “If you want to put and keep a ring on this finger, then minimum FICO standards apply.”

I am of course joking.

Oftentimes, the best solution is to use a conventional mortgage loan, rather than a government mortgage loan. Fannie Mae and Freddie Mac are the two dominant conventional loan types, and they also have low down payment options not too far off of FHA’s requirements, and they do not require that we factor in spousal debt obligations even in the 9 community property states. The key takeaway here isn’t that you should divorce your spouse if they have bruised credit. The key takeaway is that by working with someone local to where you are buying (or refinancing) real estate, you both avoid falling into the traps and 11th hour “surprises” that can come with call centers 5 states away, and you’re more likely to be offered custom tailored solutions that work for your particular circumstances. 

Does this seem like something relevant to you and your real estate goals in California? Great, let’s chat!

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