Ditch your spouse when buying that house
Your FICO credit score is sterling. Your spouse's however, is not. Will this make it a challenge to qualify for a home loan with the lowest mortgage rates?
The short answer? Yes.
If your spouse's credit score is too low -- 620 or lower -- you might want to apply for a mortgage in your name only. If you don't, mortgage lenders might either saddle you with higher rates, fees or outright deny your application.
The good news?
Just because only your name is on the mortgage loan doesn't mean that both you and your spouse can't both be listed as the owners of your home. You can still put your spouse's name on the home's title even if only your name is on the mortgage loan.
Based on the worst credit score
"Your spouse's lower score might make it hard to get a mortgage or get a mortgage at a good rate," says Anthony Sprauve, director of public relations with myFICO.com in San Jose, Calif. "Lenders don't take an average between your two scores."
Rather, mortgage lenders base their loan decisions -- including the mortgage rate -- on the lowest credit score between you and your spouse, says Don Frommeyer, president of the National Association of Mortgage Brokers and senior vice president of Amtrust Mortgage Funding in Carmel, Ind. If your credit score is 800 and your spouse's 650, lenders will assign an interest rate based on your spouse's lower score, he says.
"It's worst-case scenario," Frommeyer says. "Even though one spouse might have a great credit score, it's all based on the worst score."
Applying for a mortgage without your spouse
So when does it make sense for you to apply for a mortgage loan without your spouse?
Sprauve says that lenders today reserve the best mortgage rates for borrowers with FICO scores of 740 or higher. Borrowers with scores of 600 or lower will struggle to even earn approval from most lenders. If your spouse, then, has a credit score that low, you might think about applying for a mortgage loan on your own.
A two-income economy
Applying for a mortgage on your own brings up another challenge. Lenders also look at your debt-to-income (DTI) ratios when deciding who qualifies for home loans.
Most lenders want your total monthly debts -- including your newly estimated mortgage payment -- to equal no more than 36 percent of your income before taxes are taken out. If you are relying solely on one income, leaving the money generated by your spouse on the sidelines, you might struggle to meet the lender's DTI ratio. You might be forced to apply for a smaller mortgage loan on a less expensive home.
"Our economy is largely built today on two-income families," says Van Davis, president of broker operations for ZipRealty in Emeryville, Calif. "It's hard for many people to afford the luxury of home ownership when relying on only one income. I live in the San-Francisco-Bay area. Relying on one income would be problematic for a great number of buyers out here."
What options do you have?
Go at it alone: If your income is high enough, or if you and your spouse aren't opposed to living in a smaller, less expensive home, it might make sense to apply for a mortgage on your own, especially if your spouse's credit score will leave you with a more expensive mortgage.
FHA: If a spouse's credit score is making conventional financing difficult, consider a mortgage insured by the FHA. While the FHA doesn't have specific credit score requirements, FHA mortgage lenders typically reserve the best rates for borrowers with credit scores of 620 or above, says Keith Gumbinger, vice president of HSH.com.
Credit rehab: If you're dependent on both incomes, it's time to help rehabilitate your spouse's credit. Your spouse can boost their bad score by paying bills on time and in full every month, fixing any credit-report errors, eliminate disputed accounts, and keeping credit lines open but learning to use them wisely.
Maxine Sweet, vice president of public education for Experian, says that consumers with bad credit can start seeing improved scores after just six to nine months of mature financial behavior. Depending on how low the spouse's score was, it could take less than a year for your spouse to have a solid enough credit score to help secure your mortgage.
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Dan Rafter is a freelance writer with more than 20 years experience covering real estate and mortgage issues. He's written for the Chicago Tribune, Washington Post, Business 2.0 Magazine, Consumers Digest and dozens of trade magazines.