You want to use your credit and spouse’s income to buy a house, but the mortgage company won’t let you do that. This is a common problem, and the reason is that the mortgage company wants to limit its risk, just like you want to maximize your buying ability.
- For joint applications lenders look at both incomes but only the lower credit score.
- For individual mortgages, companies will only accept the applicant’s income and credit score.
Many home buyers have one spouse with a low credit score, but they need that person’s income to afford the house they want. This presents a dilemma about how to finance your home. So, you must be careful. Explore options such as government programs and find a good mortgage broker who will work with you to find the loan that works best for you.
Joint Mortgage When You Use your Credit and Spouse’s Income
If you use your credit and spouse’s income to buy a house you may face problems applying for a joint mortgage if one spouse has a low credit score. Mortgage companies will consider your combined income when they determine how much you can afford. However, they only consider one score.
- They take the middle score reported by the three credit bureaus for each spouse
- Then, they only consider the score for the spouse with worse credit.
- You do not get to choose which spouse’s credit to use.
Mortgage companies do this because they want to reduce their risk. A lower score indicates that you have not always paid bills promptly. The bank understands that it must consider the risk posed by the lower credit score.1
If both spouses have similar credit scores there is no issue. It makes sense to use your combined income because you will be able to get a larger loan.
- Knowing how much money you can get does not mean you have to spend all of it.
- It does precisely tell you how much you can afford.
Knowing exactly what you can afford is very important when buying a house. You can be confident in your ability to pay for the house when bidding, and the seller is assured that you can close the transaction.2
When one spouse’s credit is much lower than the other this dissimilar number presents a problem. You will pay a higher interest rate.
- You won’t be able to afford as much house.
- You may not be able to even get a loan at all if one spouse’s score is too low. But income is also very important, because you may need to show both earnings to get a loan to buy a house.
Credit scores are very important because they determine the interest rate you will get, but income dictates how much money you will get for the loan. Often you will have to show earnings for both in order to get a loan.2
You may have a dilemma regarding your credit. You may need to show both incomes to afford the house you want, but one spouse’s low credit may raise your interest rate higher than you can afford. Many couples face this challenge.
- The spouse’s score that is lower will determine the interest rate you will get.
- The mortgage company will only use the income you report to them to decide the loan amount.
If you need all the income in order to secure a loan, then you may have to pay a higher interest rate. On the other hand, if you use only one spouse on the loan you will save a lot of money over time in interest payments.1
High Income and Low Credit Score
If one spouse’s income is high but their credit score is low, you will have to make a more difficult decision. You can use one spouse’s income or credit score, but it presents challenges.
- You can not choose to use one spouse’s income and the other spouse’s credit score.
- Your mortgage company will make you choose one or the other.
- Your mortgage company will not average the scores.
- Your lender will use the score for the spouse with the weaker credit.
It is not always clear what is the best choice, but a good mortgage representative can help you make the best decision. They should walk you through the choices, and it usually becomes clear what the right decision is based on your individual situation.3
Using One Credit Score
If you decide to use only one spouse’s credit score there will be challenges. The obvious problem is that the income goes down.
- Earnings tell the lender how much you can afford
- If you can’t show as much income you can’t afford as much house.
In this situation, you must decide whether to buy a less expensive house or pay a higher interest rate.4
One Spouse Has Bad Credit
If one spouse has bad credit, then qualifying for a mortgage is harder. You must decide whether to buy a less expensive house or pay more in interest.
- If your two incomes are about the same, then excluding one will greatly affect how much you can afford.
- If the spouse with the bad number has a lower income it may be an easy decision because their income won’t affect the loan amount as much.
- If the spouse with the bad number also has a higher income, then you may not even be able to secure a loan without their earnings.
Your mortgage representative can help greatly in this decision because they can run the numbers for each situation. Taking the time to sit down with a professional is important because this will probably be the biggest purchase you will ever make in your life.4
Traditional Joint Mortgage
Getting a traditional joint mortgage when one spouse has bad credit means you need a balance. Understanding how that balance works will make your home search less stressful and happier.
- Your score represents the risk that mortgage companies take that you will not pay back your loan.
- Your income represents your financial ability to pay back your loan.
If you understand this balance you can make a more informed decision. How much house do you need? How much higher will the interest be? You need to answer these, and other questions, before you apply for that loan.3
Getting an FHA loan is a possibility if one spouse has bad credit. These loans are backed by the government, and they are designed to help people who have low savings or bad credit.
- As low as 3.5% down payments
- A minimum score of 500
- Private Mortgage Insurance (PMI) is mandatory
If your credit is bad these loans may help, but they come with a cost. You must pay PMI, and if you put very little money down it will take a long time to build equity in your home.5
A Department of Veteran Affairs (VA) loan is available if you are a veteran. VA loans are available through private banks, but the government insures the loan. It is the cheapest type of loan today.
- The VA does not have a minimum credit score to secure a loan
- Most banks require a score of 620
- There is no PMI
- 100% financing is available
If you are a veteran this is a wonderful program that rewards you for your service to our country, and you should make sure that your mortgage representative goes over the program with you.6
Good Credit, No Income
If your spouse has good credit but no income, then you should apply for a joint mortgage. There are benefits, but no downside to this situation.
- Their higher credit score will help you get a better interest rate
- It won’t affect how much money you can borrow
Banks look at your credit score separately, but they look at your income jointly. You shouldn’t worry about one of you not having an income if he/she has a high score.
Using One Income
If using one income is the best option, there are strategies to help the process. There are ways that the non-borrowing spouse can contribute funds, and you may decide that it’s better to wait and improve their credit score.
Non-Borrowing Spouse Contributions
Even though you are not on the mortgage you can still be on the deed. Beyond that, you can contribute money in other ways to help the process along.
- You can use money from the nonborrower’s bank account for the down payment and closing costs
- You can use money from any joint bank accounts
- You can also give money as a mortgage gift with a letter
As you can see there are still several ways that a non-borrowing spouse may be able to help the process along. If now is the right time to buy a house make sure that each of you is involved, and these are great ways to make sure that the non-borrowing spouse is still contributing to your future.7
Waiting to Purchase
Sometimes it’s just better to wait to purchase a home, even if you can find a way to get the loan today. There are advantages to waiting until you can repair your credit score.
- Sometimes the problem can be fixed as easily as taking care of errors in your credit report
- If you avoid making any late payments your score will go up
- Pay off the loans you have and don’t borrow any more money for a while
- Don’t apply for any new credit
- Save up for a larger down payment
If you do all these things, then before you know it your credit will improve. Then you will get a lower interest rate. You will also be able to afford a nicer home. Sometimes good things come to those who are patient and wait.3