By Jack Guttentag
(MCT)—When a married couple purchases a house with the help of a mortgage, they become subject to a wide range of legal rules and custom-based practices at every stage of the process. This column will summarize some of the major issues that arise.
Qualifying for a Standard Mortgage: If both of the parties have incomes, these can be combined in meeting underwriting rules that set ceilings on the ratio of housing expense to income. This means that they can afford a larger mortgage together than either can afford separately, and can therefore purchase a more costly home together.
But this is subject to an important proviso: Both parties must have acceptable credit scores. When incomes are combined, lenders use the lower of the two credit scores. If the lower score is too low to qualify, only the income of the partner with an acceptable score can be used.
Moral: Before you pop the question, check your partner’s credit score as well as his or her income.
Signing Requirements of Lenders at Origination: There are two documents of concern to a mortgage lender: the note, which defines the borrower’s payment obligations; and either a mortgage or deed of trust, depending on state law, which gives the lender the right to acquire the property through a foreclosure process if the borrower defaults on the payment obligation.
In community property states, a house purchased by a married couple becomes the joint property of both, no matter who put up the money to buy it. For this reason, lenders require that both names be on the deed or the mortgage. They do not require that both names be on the note because a single name does not prevent them from foreclosing in the event of a failure to pay. There are nine community property states, all in the south and west except for Wisconsin.
The remaining states use common law, under which the obligation to repay is that of whoever has signed the note, and assets are owned by the party whose name or names are on the mortgage or deed of trust. As a result, mortgage lenders will accept a single name or joint names on the note, and on the mortgage or deed of trust.
Unilateral Actions by One Spouse: I get a surprising number of emails from people who have discovered that their spouses have taken out a second mortgage, or refinanced their first mortgage, without their knowing about it. In community property states, this cannot happen if the lender knows that the borrower is married. Lenders in such case will always require both spouses to sign the new mortgage or deed of trust. It can happen if the house was purchased before marriage and the borrower deceives the lender by pretending to still be single. It is relatively easy, however, for a lender to determine an applicant’s true marital status.
Unilateral action by one spouse is more likely to happen in common law states under circumstances in which the original loan was taken out by one party as sole owner. The contracting spouse merely does it again in the same way, even though he is now married. It won’t work, however, if the second spouse is on the mortgage or deed of trust, because in that case the lender will require that spouse to sign the document.
Moral: If you move into your spouse’s house after marriage, you can prevent unilateral action by the spouse afterwards by getting your name placed on the mortgage or deed of trust. You may not want to do this, however, if you have some unpaid bills that could result in a judgment or lien against the property.
Note that some lenders use the same rules in common law states that they apply in community property states, and always check the marital status of applicants. It then becomes impossible for one spouse to borrow without the other spouse knowing about it.
Marriage Dissolution: When a couple divorce or separate, they may remain connected if they have children and also if there is a mortgage or deed of trust still outstanding. If the house is sold, then the loan is paid off. But in many cases — and especially when there are children involved — one of the parties elects to remain in the house, which means that the mortgage or deed of trust remains in force. A departing spouse who is a co-borrower, as most are, will continue to be legally responsible for the debt, and as a result may be unable to qualify for a new mortgage loan on his or her own. While the remaining spouse may agree, as part of the separation agreement, to assume full responsibility for the loan, that does not take the departing spouse off the hook unless it is agreed to by the lender, which is unlikely.
The very same problem arises when a house is purchased by an unmarried couple who subsequently split. The difference is that the unmarried couple can and should anticipate that they will split, and agree at the outset on the procedure to follow when it happens. I will be discussing this next week.
Jack Guttentag is professor emeritus of finance at the Wharton School of the University of Pennsylvania.
©2014 Jack Guttentag
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