Of marriages and mortgages
When a married couple buys a house with a mortgage, they become subject to a wide range of legal rules and custom practices at every stage of the process.
Qualifying. If a couple both have incomes, the money can be combined in meeting underwriting rules that set ceilings on the ratio of housing expense to income. That means they can afford a larger mortgage together than either can afford separately, and could buy a costlier house.
But that is subject to an important proviso: Both 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 income.
Signing requirements. There are two documents of concern to mortgage lenders: 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 foreclosure if the borrower defaults.
In the nine community-property states - all of which are in the South and West, except for Wisconsin - a house bought by a married couple becomes the joint property of both, no matter who put up the money to buy it. For that reason, lenders require both names on the deed or mortgage. They do not require both names on the note because both are not needed to foreclose.
The other states follow common law, under which the obligation to repay belongs to whomever signed the note, and assets are owned by the party or parties 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. I get a surprising number of e-mails from people who discover that their spouses have taken out second mortgages or refinanced first mortgages without their knowledge.
In community-property states, that cannot happen if the lender knows the borrower is married - the lender will require both spouses to sign the new mortgage or deed of trust.
Unilateral action by one spouse is more likely 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 or she is now married. It won't work, however, if the second spouse's name is on the mortgage or deed of trust. In that case, the lender will require the other spouse to sign the document.
Moral: If you move into your spouse's house after marriage, you can prevent unilateral action afterward by adding your name to the mortgage or deed of trust. You might not want to do that, however, if you have unpaid bills that could result in a judgment or lien against the property.
Marriage dissolution: When couples divorce or separate, they may remain connected if they have an outstanding mortgage or deed of trust. If the house is sold, the loan is paid off. But in many cases - and especially when children are involved - one party elects to stay in the house, which means the mortgage or deed of trust remains in force. A departing spouse who is a co-borrower, as most are, will still be legally responsible for the debt, and so might be unable to qualify for a new mortgage loan.
Though the remaining spouse may agree as part of the separation accord 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.
Jack Guttentag, the "Mortgage Professor," is professor emeritus of finance at the University of Pennsylvania's Wharton School. Comments/questions: www.mtgprofessor.com.