Let’s set the scene: you are financially savvy. You pay your bills on time, save as much as possible and stay on a tight budget. You take pride in your financial management skills and excellent credit score, and you and your spouse are ready to buy your first home. But if your credit goes from “very good” to “excellent”, your spouse is in the “fair” to “poor” range. Will your partner’s less than desirable score prevent you from getting a mortgage?
Understand how credit is rated
First of all, it is important to understand the role of your credit score in obtaining a home loan. Credit is one of the “3 Cs of underwriting”, along with capacity and collateral. Capacity is your ability to repay the loan – debt to income ratio, employment status, cash reserves, number of borrowers, etc. . If there are major issues with one or more of the “3 C’s,” the loan may not be approved.
When it comes to credit, lenders look at your FICO score. FICO stands for Fair Isaac Corporation, a company that has developed a method of calculating credit scores based on information from the three major credit reporting agencies: Experian, Equifax and TransUnion. Because each agency’s data may be different, your FICO scores may be different. When applying for a mortgage, your lender pulls a combined mortgage credit report from all three agencies and uses the middle number as a score to determine qualification.
So if your score is 740 and your spouse’s is 620, you can just use the higher number, right? Unfortunately, this is not how it works. Eloy Martinez, senior loan officer at American Portfolio Mortgage Corp., says that when assessing a couple’s creditworthiness, lenders pay attention to the lowest score.
“When there are two borrowers, we always look at the lower credit score, even if that applicant is not the primary breadwinner,” he said. “But there are several variables that make up a borrower’s credit score, and we also look at the couple’s overall financial profile, so don’t assume that your spouse’s lower score will automatically mean denial.”
Decide how to apply
When you apply for a mortgage with a significant other, you have the option of applying as a single applicant or as co-applicants. In some cases, it may make more sense to apply for a loan on your own rather than making a commitment with your partner. If you are the primary or the sole earner, this may be the best option. But if you’re not, and you need your partner’s income to qualify, it might be worth including them in the application.
But before you apply individually, experts say it’s important to make sure monthly mortgage payments and other homeownership costs are expenses you can handle on your own. No one wants to think of the worst case scenario, but if your name is the only one on the loan, the responsibility will be on you if you and your partner separate.
Look at your options
As mentioned, credit score is only one of the factors that are considered in a mortgage application. If other parts of your spouse’s financial situation are strong, a lower score probably won’t hold you back.
“And we’re also looking at the type of credit problems,” Martinez said. “If your spouse has been disappointed with a few late payments, but has a high Debt-to-Income Ratio (DTI) and $ 200,000 in their $ 401,000, they are much better placed than someone with the same score, but with little savings and high DTI. “
Experian says that another tactic that could lessen the impact of your spouse’s bad credit is to make a larger down payment, which shows the lender that you won’t have to borrow as much. The credit reporting agency also adds that “many lenders offer programs for first-time homebuyers who tend to be more lenient with credit standards.”
Consider taking a step back
If you’re in no rush, another option is to put the home buying process on hold to improve your spouse’s credit. Start by reviewing a copy of their credit report. You are entitled to one free report each year via www.annualcreditreport.com. Experian says to “make sure there are no errors that could lower your spouse’s credit scores,” adding that “if there are any errors in the report, dispute the errors for them. delete. “
If everything looks right, make sure your partner pays all bills on time, as payment history is one of the most important factors in calculating credit score. The credit utilization ratio is also an important consideration. This number tells lenders what percentage of your available credit you’re using, and Experian suggests keeping usage below 30% or, ideally, below 10%.
“The better the score, the more opportunities you have,” said Martinez. “And sometimes just raising your spouse’s score a little can change the whole landscape.”
Talk to a professional
There are still a lot of misconceptions about the mortgage, so before you assume that your spouse’s credit will keep you from achieving your dreams of home ownership, it’s worth discussing with a local professional lender. .
“I think fear and assumptions really stop people from having a lot of opportunities,” Martinez said. “Potential borrowers would do themselves a great favor and save a lot of time if they had that initial conversation to discuss their options. Even if that means they have to wait a while, they will at least have the information and can make a plan for the future.
For a list of experienced lenders in the area, visit the Greater Lansing Association of REALTORS® website at www.lansing-realestate.com.