So, you’ve found a person with whom you want to spend the rest of your life. When you met, it was like you’d known each other forever. And now, the two of you want to buy a home and build a life together.
In an ideal world, your perfect partner would also have perfect credit. But even the best relationships have their sore spots. It’s not unusual to find yourself in a relationship with someone whose financial history is different from your own.
If you and your partner hope to be homeowners, and one of you has a less-than-stellar financial track record, there’s still hope. But you’re going to have to do some legwork and make some decisions about how best to secure financing for your future home. (The good news? It can be done. Read on.)
How Lenders Evaluate Credit Scores for Co-Borrowers
First, it helps to understand how lenders look at credit scores for folks applying for a mortgage together.
When two co-borrowers apply for a mortgage, lenders take a look at the credit scores for both of them from all three credit reporting bureaus:
|Credit Scores||Partner A||Partner B|
Then, lenders determine the median score for each person. (‘Median score’ is math-class talk for ‘put the numbers in order from lowest to highest and pick the one in the middle’).
For individuals applying for a mortgage, lenders use that median score to make their decision about whether they’d be willing to work with a borrower, and if so, what sorts of interest rates they’d be willing to offer him or her. Remember: a better credit score represents less risk to a lender. So folks with better credit scores pay less interest and generally get better deals on their mortgages.
For folks applying for a mortgage together, lenders will use the lower of the two partner’s median scores. In the scenario above, lenders would base their decision on whether or not to offer this couple a mortgage based on the middle score for Partner B, since it’s lower—in this case, much lower.
If the credit situation with you and your partner is similar to the example above, don’t panic. Homeownership is not totally out of the question. You’ve got a few options about how to approach your quest for a mortgage.
Option A: Clean up the Low-Scoring Partner’s Credit
Choosing to wait to apply until someone’s credit score improves may be the best approach if:
- You and your partner aren’t in a huge hurry to be homeowners
- Or your partner’s low credit score can be fixed quickly
Waiting to buy a home may mean a few more years paying rent to line the pockets of a landlord without building equity in something you own. But if your partner’s credit situation is bad enough? The extra years spent paying down debts or managing credit responsibly may be more important than becoming homeowners right now.
That said, you and your partner should take a good look at your credit reports to see if maybe the low scores can be improved sooner rather than later.
First, check your credit report for errors—they’re more common than many people might think.
Bringing any accounts that are past due back up to current can help.
If accounts in poor standing have been sent to collections, check the calendar to see whether or not settling with a collections agency will help your score. In most cases, negative information should be removed from your credit report seven years after it is first reported. Partial payment to a collections agency can ‘reset’ the timer, so to speak. So if you’re close to the seven-year mark, it may be worth it to just wait it out.
Also, sometimes the credit reporting bureaus fail to remove negative information right at the seven-year mark. So if you or your partner spot something on your credit report that’s older than seven years and potentially dragging down your credit score? Dispute it with the credit bureau right away.
Even if your partner’s low credit score is the result of an error, and you get everything sorted out right away, it can take a few months to get disputed information on a credit report changed or for new account balances to be reflected.
So while taking the time to clear up your credit or your partner’s credit is definitely a good thing overall, it can put a hold on applying for a mortgage for a month or two, minimum.
Option B: Just One Partner Applies for the Mortgage
But what if your partner’s credit situation is really messy? Messy like it’s going to take a few years on the straight-and-narrow to get this cleaned up and we want to buy a home this decade?
In that case, you two may be better off if just the partner with the better credit history applies for a mortgage, without the lower-scoring partner.
The big downside to the solo-applicant approach is that without your spouse or partner on your mortgage application, you won’t be able to use his or her income to help you qualify for your mortgage loan. And that means you may qualify for a lower overall amount than you would if you were to apply together.
Still, if one partner has truly terrible credit? Or if one partner’s income is enough to cover what you’d need to pay your mortgage each month? Then a solo-application could be your best option.
In most cases, both you and your partner can be listed on the title of the home, even if only one of you is on the mortgage loan.
You can also potentially add your partner to the title on a home you own as an individual by refinancing your mortgage at some point in the future. (Just don’t try to be sneaky on this one. If you add someone to a title without telling your lender about it? You could face significant penalties, including your lender calling your mortgage due in its entirety.)
It is worth pointing out that having just one of you take on the liability (the mortgage) for an asset you both own together (your home) could present some difficulties if you split with your partner in the future. Many happy couples live full and contented lives in homes purchased with a mortgage obtained by just one of them. If you want to be homeowners right away, applying solo for your mortgage may be an option worth pursuing.
Option C: Find Another Co-Borrower
if your income without your partner isn’t enough to qualify for a mortgage, and your partner’s credit situation is too messy to qualify for a mortgage with you? You could consider seeking out another co-borrower to stand in for your credit-challenged partner.
Any co-borrower on a mortgage will be equally responsible for the debt if you default on your mortgage. So finding a co-borrower is a big ask. Think kind, generous, and financially stable relatives who trust you and really care about you. Folks like parents, grandparents, or maybe siblings might come to mind.
Still, if you’re fortunate enough to have people like that in your lives, there’s no rule that would keep you from applying for a mortgage with, say, your mother-in-law instead of your wife.
Upsides to that could include qualifying for a larger amount. Or perhaps getting a better interest rate, thanks to you and your co-applicant’s excellent credit. Depending on your extended family, the ability to buy a home now may be worth some slightly awkward or complicated family Thanksgiving dinners in the future.
Ready to Get Started?
Lives are complicated, but remember: people with less-than-perfect financial situations buy homes every day. If you’re ready to get your journey to homeownership started, we’re here to help.