The decision to purchase a home is one of the most important that you will ever make in your life. There are obvious financial implications to making this decision. There are emotional, relational, and other ramifications of doing so that you may not be considering. Whatever your martial and financial circumstances are, it is always wise to pause and take a step back before making an important decision. This is even more true if you are thinking about purchasing a new home without your spouse's involvement.
Texas is a community property state. We could go on a long and uninteresting discussion of what this means for you and your spouse. Still, if you type "community property" into the search bar at the top of this webpage, you will find hundreds of blog posts regarding community property law. For our purposes in this specific post, I will begin by telling you that that community property laws in Texas presume that all property acquired during your marriage is owned jointly by you and your spouse. So, if you were to purchase a home during your wedding, it is presumed that you and your spouse own that home as a part of your community estate.
Unless you have saved up a significant amount of money or have inherited money from a deceased friend or relative, the odds are that you will be taking out a mortgage to finance the purchase of a new home. Mortgage lenders will review many factors when deciding whether or not to loan you money and then ultimately how much money you will be able to borrow. Your credit score, other debts, income history, your field of employment, and employment history are relevant factors to a mortgage lender.
Most of the time, spouses will want one another to be a part of the mortgage lending process because the more you and your spouse can put down that you earn, the more money that can be borrowed and the better house you can likely purchase. Whether or not it is a good idea to borrow as much money as possible is a discussion for another blog post on another website. We need to keep in mind in the context of Texas family law that the ability to pay that mortgage each month is critical to understanding how a home mortgage functions within a divorce.
Now that we have laid out the ideas that I want to discuss in today's blog post, I will address the issue head-on; if you're going to apply for a home mortgage without your spouse's input or involvement, it may be a good idea in some situations. Let's take some time to go over what those situations may be. When we are done, you will better understand whether or not your circumstances match up with one that I am about to lay out for you. Depending on the type of loan that you are applying for, be aware of these situations.
Rule #1: Debt is shared in Texas
A mortgage lender will likely need to run a credit check of your spouse even if she is not a part of the mortgage application. As I went over with you a moment ago, lenders consider several different factors when determining how much money (if any) should be lent to you in the form of a home mortgage. Your spouse's credit score and history are relevant to many lenders in situations like yours. You may be able to find a mortgage lender who does what is called "manual underwriting"- where more than just the credit score is checked. However, many lenders nowadays run a credit score of you and your spouse to determine whether a loan offer will be made.
Rule #2: How much money do you owe, and how much money do you earn?
In business terms, this question could be called a debt to income ratio question. On this question especially, it is helpful to have a spouse be a part of the application process—the more income you have, the more (theoretically) that a mortgage lender can loan you. For example, if you want to purchase a home whose monthly mortgage payment would be $2,000, a $3,000 monthly income stream would not allow you to be loaned enough money to buy that home.
You do not have enough income to cover the mortgage payment in all likelihood- even if you don't have any other debt. Considering everyday things that we have all to deal with: utilities, credit card debt, student loan payments, etc., a $2,000 mortgage payment on $3,000 a month is a recipe for disaster. You would need to consider either stepping down in the house and borrowing less money (or putting more into your down payment). The alternative would be to bring your spouse into the borrowing equation.
Of course, if your spouse does not work or has a ton of debt herself that she has come into the marriage with, you probably would not want to involve them in the borrowing process unless you have to. In many states, you would be ok to leave her out of the picture when it comes to borrowing a home loan. In Texas, that is likely not the case, however. I am thinking of Fair Housing Administration (FHA) and Veterans Administration (VA) loans.
Rule #3: Consider the consequences of not making debt payments on time and in full
If debt has become a part of your lifestyle, you are undoubtedly familiar with how loans are made to be paid back on a schedule. You probably were able to select, for example, a date of the month that your credit card bill was to be paid. A part of that agreement is to spend at least a minimum payment to the credit card company by the date that you have chosen each month. The failure to do so carries an increase in the interest rate at future payments are to be made. Additionally, you may find that there are consequences to keep in mind related to borrowing money to purchase a new home.
When payments on debts are "old" or well past due, the financial industry refers to this situation as charge-offs and collections. The lender/creditor believes that the debt that you are eight months behind in paying is very likely not to be paid back to them. When this happens, they can go into your credit report and make a mark against you. These accounts may remain on your credit report for up to seven years. That means if you attempt to take out a loan, like a mortgage, that lender will be able to see that you have become woefully behind on another credit account. This will impact your ability to be loaned money in the future. Even if a loan is extended to you, the interest rate you receive may make it so that you can essentially borrow money moving forward.
In this situation, you or your spouse can work to pay the lender back in full. Often the lender will be able to accept a quarter on the dollar (or less) if you come to them in good faith and make them a settlement offer. If the lender has sold your loan to a third-party debt buyer, that debt buyer may be willing to accept a settlement offer you make pennies on the dollar cheaper than the original loan amount that you were unable to make payments on.
This area of our discussion today relates heavily to one of the prior sections of our blog post that dealt with your debt to income ratio. Since many types of mortgages in Texas require that your spouse's financial history be a part of the lending process, charge off, and collections can heavily sway whether or not money can be loaned to you. In some situations, the lender may need to be paid off at the closing of your home before that process coming to a close.
Is it even worthwhile to apply for a home loan in Texas without your spouse?
After you and I have gone over all of this information, the question may have entered your mind as to whether or not it even pays to apply for a home mortgage using only your information. After all, if your spouse's credit report, debt to income ratio, and payments history become relevant, wouldn't it make sense to always include them in the application from the beginning?
I would point out that even though their credit history is relevant and their credit report will be reviewed, your spouse's credit score may not be as crucial to whether or not you all will be loaned money to purchase a new home. Lenders will typically not deny you a mortgage if your spouse has a low credit score. So, if you apply for a home mortgage in Texas by yourself, your spouse's credit score is typically not at issue. Using together, however, means that both of your credit scores will be reviewed.
What happens if you and your spouse get a divorce after purchasing a home?
If your home were purchased during your marriage, the judge would not look to whether or not both of your names are on the mortgage or even on the title to the home. It is presumed that the house is a part of your community estate if purchased during your marriage. There are exceptions to this rule, but those exceptions need to be supported by evidence. Otherwise, the community property presumption would hold, and the house would be subject to division in your divorce.
Supposing that the house you own is community property, a decision will need to be made about what you and your spouse will do with the house. Option one is to sell the house and then split the equity made in the sale. For example, if you sell your home for $200,000 and only owe $50,000 on it, approximately $150,000 in equity would need to be divided between you and your spouse. How that equity is divided up would be determined based on the circumstances of your specific divorce.
The other alternatives would be for one of you to remain in the house after the divorce. That means that one of you would be paying the mortgage off of your income alone. Whether or not this is financially feasible for either of you to do will determine whether it is even an option you can choose to undertake. Otherwise, the house will likely need to be sold as a part of the divorce. It is up to you to determine the details inside the divorce. Talk with your lawyer about your options and whether or not it would be in your best interests to remain in the house after the divorce has concluded.
Questions about buying a house without your spouse? Contact the Law Office of Bryan Fagan
The attorneys with the Law Office of Bryan Fagan appreciate the opportunity to share with you this information about real estate, family law, and community property in Texas. If you have any questions about the material you have read today, please do not hesitate to contact our office. Our licensed family law attorneys offer free-of-charge consultations six days a week here in our office. These consultations are an excellent opportunity to learn more about your case and ask questions that directly impact you and your family.