I am repeating this blog from several years ago because I forgot to include a MAJOR reason to drop your husband.
The following text from an agent prompted my original blog, as it made for great blog fodder.
“I received an offer on a property and it’s ‘wife only,’ stating ‘husband is starting a business and that’s why he isn’t on the loan.’
I didn’t just fall off the turnip truck.
Does this mean the husband has bad credit and they are trying to qualify with just her, and is that an issue?”
Switching From W2 Employment To 1099/Self-Employment Requires Two Years Of History
The husband in the above scenario could have had stellar credit and likely did, but there was no reason to include him on the loan because the lender would not have been able to use any of his income until he had a two-year-history on his tax returns.
This is the case even if he had guaranteed contracts in place that would have earned him $2 million in year one. Newly self-employed borrowers need two years of income history before lenders can use their income to help qualify for a loan.
In the above scenario where the husband just started his business in 2019, lenders would not be able to use his income to qualify until he filed his 2021 tax returns in early 2022 (close to 2.5 years after he started his business).
One Year Of Tax Returns – Exception For Long Established Businesses
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. There are a few other exceptions, too, that I am omitting here because they seldom arise.
When Borrowers Should Drop A Spouse/Partner From A Loan
- Borrowers should drop a spouse from the loan whenever debt ratios are tight, and the hit from the other spouse’s monthly debt 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 at all if debt ratios are tight.
If a spouse has $3,000 of monthly income and $2,000 of monthly debt payments, he too should not be on the loan if debt ratios are tight because his debt burden offsets his income benefit.
- Borrowers should also drop a spouse from the loan if the combined income of both spouses is too high to qualify for special low-rate loan programs. This is the new factor I failed to mention in my previous blog. We have awesome super-low-rate loan programs (for certain areas) that have income limits, and sometimes we have to punt a spouse from the loan to stay under those limits.
Dropping Low-Credit-Score Spouse
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.
What If A Spouse With No Income Has Great Credit? Won’t It Improve The Loan Terms? No.
Most lenders correlate to the lowest credit score of all borrowers on a 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.
FHA Includes Both Spouses’ Debts No Matter What
FHA requires that the debt service requirements of both spouses be included in the liabilities section on a loan application whether both spouses are on the loan or not.
If one spouse’s credit is particularly bad, it might still be beneficial to drop him from the loan, but his debts will still be included.
Title Only
As a final reminder, 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 can and need to be on purchase contracts if they want to be on title though.
