You need a strong FICO credit score to qualify for a mortgage loan. But did you know that even if your score is high, the credit score of your spouse or partner could keep you from qualifying for a mortgage?
It’s true: Even if your FICO credit score is excellent, if your spouse or partner is applying for a mortgage with you — putting his or her name on the loan application — this person’s lower credit score could scuttle your chances of qualifying for a home loan.
Why? It’s all because of the that lenders look at when reviewing mortgage loan applications.
What lenders want to see on mortgage applications
Lenders will look carefully at your three-digit when determining whether to approve you for a
mortgage loan. They’ll consider your score, too, when calculating what interest rate to attach to your loan.
In general, the higher your credit score, the better your chances of qualifying for a mortgage with the lowest interest rate.
Lenders vary, but most consider FICO scores of 800 or higher excellent. Your odds of qualifying for a mortgage are higher if your score is at least 620, though the lower your score, the more likely you are to get saddled with a higher interest rate.
What happens when more than one person applies for a mortgage?
When you apply for a mortgage with someone else, such as your spouse or partner, your lender will look at the credit scores of both you and your fellow applicant. This could be important if you or your fellow applicant has a particularly lower score.
Which score matters most? It gets complicated, but mortgage lenders base their lending and interest rate decisions on the lowest middle credit score among all loan applicants.
What does ‘lowest middle credit score’ mean?
You have three main FICO credit scores, one each maintained by the national credit bureaus of Experian, Equifax and TransUnion. These scores are usually similar but can vary by a few points.
Your spouse or partner will have three of these scores, too. And when you and this person apply for a mortgage loan together, your lender will see all six of your FICO scores.
Say you have FICO scores of 700, 750 and 770. If you were applying for a mortgage on your own, your lender would consider your middle score of 750 when determining whether you qualify for the loan and at what interest rate.
But say you are applying with a spouse or partner, and your fellow applicant’s FICO scores are 680, 640 and 670. Your lender will then base its decision on your co-applicant’s 640 FICO score. None of your scores will matter, even though they are stronger than the scores of your spouse or partner.
Why this matters
This is important if your spouse’s or partner’s FICO score is significantly lower than yours. The lower the score that your lender considers, the more likely it is that your loan application will be denied. Even if you have excellent credit scores, if the scores of your spouse or partner are weak, this might be enough to scuttle your mortgage application.
Even if your co-applicant’s score isn’t low enough to warrant a rejection from your lender, it could leave you with a higher interest rate. And the higher your rate, the higher your monthly mortgage payment. Depending on how high your loan’s interest rate is, you might pay hundreds of dollars more each month.
What to do when your partner has a low credit score?
There are solutions to this problem. One is to leave your spouse’s or partner’s name off your
mortgage application. If you do this, your lender won’t consider the lower credit scores of your spouse or partner, and these scores will no longer hurt your chances of qualifying for a mortgage.
There is a downside, though: If your spouse or partner doesn’t apply with you, your lender can’t consider the income that this co-applicant would bring to the transaction.
Lenders don’t only look at credit scores when determining who qualifies for a mortgage. They also consider the income and debts of applicants. That’s because they want to make sure that borrowers can afford to make their mortgage payments each month.
If your spouse or partner doesn’t apply for a mortgage with you, your lender won’t consider this person’s income. This means that you might qualify for a smaller mortgage, something that could keep you from landing your dream home in your ideal neighborhood. You’ll have to determine whether the pain of your co-applicant’s lower credit scores is worse than the challenges that would come from relying on just one income stream when applying for a mortgage.
What about ownership of the home? Your spouse or partner can still have his or her name on your home’s title even if this person doesn’t sign the mortgage. This means that your spouse or partner will share ownership of your home with you, though you are still the person legally responsible for making the monthly mortgage payment.
You and your partner might simply pool your dollars to make this payment each month. But if you should stop making this payment, your lender will eventually file foreclosure proceedings against you, not your partner or spouse, because your name on the mortgage application means that you are responsible for making this payment.
Boosting your partner’s score
A better option, though it will take patience, might be to wait until you can boost your partner’s or spouse’s credit scores.
Fortunately, isn’t a complicated process. The most important step is to pay your bills on time each month. Certain monthly payments, including your required minimum monthly credit card payment and your mortgage, auto, student and personal loan payments, are reported to the three national credit bureaus. If you pay any of these bills 30 days or more past your due date, your FICO score can drop by 100 points or more. But if you pay these bills on time each month, your credit score will steadily increase.
Paying down your credit card debt will help, too. The less of your available credit that you are using, the better it is for your credit score. That’s because of something called your credit-utilization ratio. Lenders like it when you aren’t running your credit card balances up to their maximum or near it. If you have extra money each month, devote it to paying down your credit card debt. As you pay down this debt, your score will steadily rise.
Don’t open several new credit card accounts, either. The older your credit card accounts, the better it is for your FICO score. If you suddenly open several new credit card accounts, your score could take a dip.
If your spouse or partner can practice these good financial habits, his or her credit score should gradually improve. This won’t be an overnight process, though: Repairing a lower credit score does take time. Depending on how low a credit score is, it might take your spouse or partner a year or more to see enough improvement to inspire confidence in mortgage lenders.
You’ll have to determine if waiting for these higher scores is a better strategy than applying for a mortgage on your own.
