FHA Loan Facts and Fiction About Credit

November 5, 2013

Here’s a common question we get about FHA loan credit requirements--a variation on a theme that goes something like this:

“My spouse and I are looking to apply for an FHA loan. We just recently got married. He is more than qualified to apply on his own, with a good credit score and great income. I, unfortunately, have terrible credit and unresolved debts. Is it possible for him to apply on his own without factoring in my debt? We were told I had have my credit checked and my debt would also be factored into the debt to income ratio, but not my income. Is this true?”

Unfortunately there is no one single answer to questions like these due to state law, which may affect how an FHA loan application is reviewed depending on whether the state is a “community property” state--one where the law requires both borrower and spouse to be equally obligated on major financial transactions such as a home loan.

FHA loan instructions to the lender in HUD 4155.1 Chapter Four, Section A say:

“Except for obligations specifically excluded by state law, the debts of the non-purchasing spouse must be included in the borrower’s qualifying ratios, if the

• borrower resides in a community property state, or
• property being insured is located in a community property state.”

FHA loan rules add, “The non-purchasing spouse’s credit history is not considered a reason to deny a loan application. However, the non-purchasing spouse’s obligations must be considered in the debt-to-income (DTI) ratio unless excluded by state law. A credit report that complies with the requirements of HUD 4155.1 4.C.2 must be provided for the non-purchasing spouse in order to determine the debts that must be counted in the DTI ratio.

Note: This requirement is applicable if the subject property or the borrower’s principal residence is located in a community property state.”

FHA loan rules DO NOT override state or federal law, so it’s crucial to check the laws of your state to see what might apply in such cases. For more information on this issue, borrowers can also check with a legal expert or real estate expert who can advise on state law as applicable.

Some borrowers may not be affected by community property laws for the simple reason that not all states have such laws, but anyone who does live in community property states will need to carefully examine both the spouse and non-purchasing spouse’s credit during the preparation time leading up to the loan application.