Can a lender request information from a non-borrower spouse for a USDA home loan?
A lender is required to request income, debt and other financial information for a non-borrower spouse for a USDA home loan for two reasons, which we explain below.
First, if you live in, or if the property being financed is located in a community property state, then lenders include the non-borrower spouse's monthly debt payments in the applicant’s debt-to-income ratio, unless specifically excluded by state law, even though he or she is not on the mortgage. We should emphasize that this requirement applies regardless of if the non-borrower spouse intends to live in the property being financed.
For example, if your spouse has $400 in monthly debt expense in her or his name only, the lender factors that expense into your debt-to-income ratio even though you are not legally responsible for that debt and they are not a borrower on the mortgage. The higher your monthly debt payments, the lower the mortgage amount you qualify for. The USDA home loan program usually applies a maximum debt-to-income ratio of 41%, which is lower than other programs.
This means you can spend 41% of your monthly gross income on total debt payments including your mortgage, property tax, homeowners insurance, mortgage insurance and non-housing related debts such as credit cards and car, personal and student loans. Including a non-borrower spouse’s monthly debt expense but not her or his income (because he or she is not on the loan application) in your debt-to-income ratio can make it more challenging for you to qualify for the mortgage as a sole borrower.
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The USDA home loan program applies this guideline because they do not want a sole applicant to be overburdened by the debt obligations of a non-borrower spouse. Additionally, this approach prevents applicants from shifting debt to the non-borrower spouse to make it easier to qualify for the mortgage.
For example, you cannot put all of your joint debts in your spouse’s name, apply for the mortgage as a sole borrower and then qualify for a higher loan amount. This is the exact scenario that USDA home loan guidelines prevent and why the lender reviews the non-borrower spouse’s credit report and other information.
Please note that if you do not live in, or if the property being financed is not located in a community property state then your spouse's debt obligations may not be factored into your mortgage application.
Your spouse's income, debt and other financial information can also be excluded from your application if you have been living separately for at least three months or if you have legally filed for a divorce or separation. If you have not been living together, you are required to document that your spouse lives at a different address by a property title, rental agreement, bills or other financial documents.
In these cases the lender includes your personal debt expenses and debt expenses that you hold jointly with your spouse but excludes your spouse’s income and personal debt expenses.
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The second reason why a lender requires financial information from a non-borrower spouse when you apply for a USDA home loan is if the spouse plans to live in the property being financed. This is because the USDA program applies a household income limit that includes all members of an applicant's household, even if they are not on the mortgage. The adjusted gross income limit for the USDA Guaranteed Home Loan Program is typically 115% of the median household income for the area.
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So if a spouse not a co-borrower on the mortgage but plans to live in the property, the lender is required to include the spouse's income to calculate the adjusted household gross income figure to determine if you are eligible for the mortgage. In this scenario, according to USDA Home Loan Program guidelines, the lender is not only permitted but required to request financial documents such as tax returns and bank statements to verify any potential income earned by the non-borrower spouse.
The non-borrower spouse’s income may be the deciding factor in determining if you qualify for a USDA mortgage, even if you apply for the loan as a sole borrower. If you, your spouse and other household members’ combined adjusted gross income is lower than the USDA borrower income limit for your county, then you should be approved for the loan, assuming you meet the other borrower qualification guidelines. If your household adjusted gross income is greater than the income limit, then you are not eligible for a USDA home loan.
Additionally, when you apply for a USDA home loan lenders are required to verify the assets held by all household members which may be another reason why the lender requests financial documents from a non-borrower spouse. In some cases, cash withdrawals from a personal business by a household member are also included in the applicant's income calculation which is why the lender may request bank statements from a non-borrower spouse.
Lenders review income and asset information from a non-borrower spouse that lives in the property to make sure that you do not attempt to get around the household income limit. For example, you cannot exclude a spouse from your mortgage application so that you do not exceed applicable income limit.
If you have questions about qualification guidelines, we recommend that you contact lenders that offer USDA mortgages to review your individual situation. You can use the FREEandCLEAR Lender Directory to search over 3,900 lenders by mortgage program. For example, you can find top-rated lenders in your state that offer USDA home loans.
Sources
"Chapter 9.3.B. Calculation of Annual Income." Single Family Housing Guaranteed Loan Program Technical Handbook. U.S. Department of Agriculture, 2020. Web.
"Chapter 11.2.B. Debts of a non-purchasing spouse (NPS)." Single Family Housing Guaranteed Loan Program Technical Handbook. U.S. Department of Agriculture, 2020. Web.
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