When it looks like your spouse can kill the deal
Q: When should I drop my husband from a loan application?
A: This is part of a blog from my favorite lender, JVM. It was in reference to a text about an offer that only had a married woman as the buyer.
We laughed about its implications, but it reminded me that you can go it alone.
You should remove a spouse from a contract if he was previously a W2 employee and now is self-employed and is paid with a 1099. The husband in this scenario could have stellar credit, but there is no reason to include him if he has been in business less than three years. Newly self-employed borrowers need two years of income history before lenders can use that income to help qualify for a loan.
Lenders can sometimes get by with only one year of tax returns from a self-employed borrower, but that borrower needs to have been in business for at least five years.
You should also remove him whenever debt ratios are tight and the hit from the other spouse’s monthly payments exceeds the benefit from the other spouse’s income. If a spouse has no income and even small debt payments, he should not be on the loan if debt ratios are tight.
If a spouse has $3,000 of monthly income and $2,000 of monthly debt, he too should not be on the loan if debt ratios are tight because his debt burden offsets his income benefit.
A spouse should also be dropped from the loan if he has a low credit score that is adversely impacting the interest rate and his income is not needed to help qualify. This is the case whether debt ratios are tight or not.
Great credit?
People often think that if the no-income spouse has great credit, it will benefit the high-income spouse. But that’s not the case.
Most lenders correlate to the lowest credit score of the borrower’s loan application. So if a no-income/high-debt spouse has an 850 credit score while the high-income spouse has a 650 score, it does no good to add the no-income spouse to the loan.
The Federal Housing Administration (FHA) includes both spouses’ debts no matter what. The debt service requirements of both spouses must be included in the liabilities section on an FHA loan application – whether both spouses are on the loan or not.
If one spouse’s credit is particularly bad, it might be beneficial to drop him from the loan but his debts will still be included.
On the other hand, spouses can almost always be “on title” even if they are not on a loan. This is called a “title only” transaction, and it is relatively common.
“Title only” spouses need to be on the purchase contracts if they want to be on title, though.
Lynne French is a Realtor with Compass Real Estate and captain of the Lynne French Team. Send your real estate questions to lynne@lynnefrench.com or 925-672-8787.
Lynne French
Lynne French is a Realtor with Compass Real Estate and captain of the Lynne French Team. Originally from Chicago, Lynne French came to San Francisco at the height of the 1960 and started a boutique at age 21. She went on to open two other shops. As industries shifted, Lynne took off on an adventure as a truck driver. For 10 years Lynne owned, operated and drove her big rig throughout the 48 states. One day, her truck broke down for the last time, and it was time to move on. In 1993 an ad for real estate training caught her eye and she began her real estate career as an assistant. Eventually she struck out on her own and had to hire her assistant to handle the volume of work. Lynne's decision to become an office in 2005 came from a sincere alignment with three basic principles: hire the best people, give them the best tools, create thriving communities. When not helping her clients, Lynne and her husband Danny enjoy country living within the foothills of Mt. Diablo.