Most people buy a home with someone else, though there are more single homebuyers than ever before, especially women. Often, it’s a married couple buying a home, but there are also many unmarried couples and partners who aren’t romantically involved who are taking the homebuying plunge together.
When you buy a home with someone else on the mortgage, it changes everything. Here’s how buying a home with a partner impacts your mortgage application.
Did you know that even if you’re married, your credit score and your spouse’s credit score are entirely separate? This is true no matter how long you’ve been together and even if you share all of the same accounts and loans.
If you want to use your spouse’s income to qualify for the loan, you’ll also have to use your spouse’s credit, for better or for worse.
How Lenders Use Two Credit Scores
Lenders use both partners’ credit scores, but a common myth is that they take the scores and average them, which isn’t the case. Instead, they do this:
Each applicant has three credit scores (one from each major credit bureau), and the lender looks at all of them. Let’s say the first applicant’s scores are 750, 730, and 715. Let’s say that the second applicant’s scores are 650, 630, and 615. The lender goes with the lowest middle score, which is 630 for this application.
Your loan’s interest rate will be based off of that lower credit score, and if you have very different scores, it can have a substantial impact on what kind of home you’re able to afford together.
If Your Partner Has Poor Credit
If your partner has poor credit, you have a few options when you’re applying for a loan.
- Leave Your Partner Off the Loan If your partner has poor credit, he or she may do more harm than good when you’re trying to qualify for a loan. Sometimes it’s best for the person with the good credit to get the mortgage alone. Of course, since you can’t use your partner’s income, it will lower the total amount of loan you qualify for (more on this in a minute).
- Find a Co-Signer You can find a relative who’s got great credit and is willing to help you co-sign for the loan in lieu of your partner. If your partner’s credit improves, you can always add them to the loan later and remove the co-signer by refinancing your mortgage.
- Wait for Your Partner’s Credit to Improve If you’re willing to wait a little while to buy a home, your partner can improve his or or her credit. You can usually see a moderate improvement in six to eight months by avoiding late payments, not applying for new credit, and paying down credit cards as much as possible. A credit repair service may also be able to help you speed up the process.
Using a partner’s income can really increase your chances of getting favorable loan terms and qualifying for the house you want.
The more income you use to qualify for the loan, the greater the dollar amount you’ll qualify for. This is because lenders won’t allow you to allocate too much of your income to your mortgage payment.
Your debt-to-income ratio (commonly called DTI) is the amount of debt you pay every month (including auto loans, credit card debt, personal loans, and your new mortgage) divided by your gross monthly income. This number is the number one way lenders verify that you’ll be able to repay the loan.
For example, if you have $10,000 in income every month but have $3,000 in monthly debt payments, your DTI is 30%.
An ideal DTI is 36% or under, though many lenders and loan programs will allow higher DTI ratios. Conventional programs allow upwards of 50%, government loans like FHA and VA allow 55% and even higher in some situations, but most jumbo loans are limited to 43% maximum.
Remember though, these percentages represent all ALL your debt combined. So the more credit card, auto, installment, student loan, or other debt you have, the smaller your mortgage payment can be, and the less of a loan you’ll be able to qualify for.
If Your DTI is Too High
If your DTI is higher than the guidelines allow for the loan program you’re interested in, you have a few options:
- Leave Your Partner Off the Loan If your partner’s debt is very high, it may make more sense to leave him or her off the loan entirely. You won’t get to use the income, but you won’t have to use the debt, either.
- Add a Co-Signer As mentioned before, a co-signer with good income can make the difference between your qualifying for a loan or not.
- Pay Down Debt If you’re not in a rush to buy a home, you can pay down some debt before you apply, giving you a more favorable DTI.
- Get a Gift Get a gift from a direct family member to increase your down payment.
- Look Into an ARM An adjustable-rate mortgage, or ARM, can help you save money on your monthly payment.
- Ask for Raise It can’t hurt, right? Increasing your income might be the thing that lowers your DTI enough that you can qualify for a loan.
A Final Word About Buying Together
Buying together can be complicated, and no mortgage scenario is exactly the same. If you’re not sure what’s right for your situation, I hope you’ll give us a call! We’re here to help you figure it out.