Applying for a Home Loan as a Couple

Applying for a Home Loan as a Couple

Applying for a Home Loan as a Couple

When one of you has good credit and the other doesn’t

By Emmet Pierce
Photo: Family standing in front of new home holding signage

Your partner's financial history is just as important as their personal one. Photo: iStock

Buying a home with a spouse or domestic partner who has a checkered credit history can hurt your financial future. When you apply for a mortgage loan using your joint income, each partner’s credit history typically is weighed equally. If one of you has been dodging creditors or paying bills late, you are likely to pay a higher interest rate to offset the perceived risk of default.
"Both credit histories will be melded and the lender will be looking at the whole picture," said Carol Kaplan, a spokeswoman for the American Bankers Association.
Craig Watts, spokesman for the Fair Isaac Corp., which created the FICO credit score, suggests that couples should share the results of their reports from the three major credit bureaus before they apply for a home loan. Each of the bureaus — Equifax, Experian and TransUnion — will provide one free report each year. By carefully reviewing their partner’s reports, borrowers will see what the lenders see. Once they have identified problems, they can begin raising their scores by establishing better financial practices. That means paying bills on time and in full.
It may not sound romantic, but people should carefully consider their partner’s credit history before agreeing to merge finances in a joint home purchase, Watts said. "You’ll want to share the good things and the bad things you have done, as far as credit goes, because it absolutely will affect your future together. The biggest cause for divorce is financial incompatibly."
If you are planning to repair your damaged credit, give yourself plenty of time. You may be sincere about making a fresh start, but it could take months for your credit score to catch up with your improved behavior. One way to help someone raise their credit score is to make them an authorized user on a credit card that is held by someone with solid credit, Watts said. An authorized user has the right to use the card but no obligation to pay it. The credit card company normally won’t object since another name on the account usually results in more business.
Other options
If you decide that you need to proceed with your home purchase before you can improve your combined credit history, there are mortgage options. You may be able to qualify for a subprime loan. These loans are designed for people with less-than-perfect credit. They typically carry higher interest rates. Although there are no guarantees, it may be possible to use a subprime loan to purchase a home and refinance into a better loan later after you have established a higher credit score.
Another alternative for couples is to buy a home under just one name. If the partner with the higher credit score has an adequate income, the lender may not require that the mortgage be issued to both partners. Eventually, the couple could seek to refinance into a new loan under both names.
Perhaps the most important thing you can do as a couple is to take an honest look at your finances before you consider applying for a home loan. Ask yourself if you represent a good lending risk. If not, consider delaying your loan application until you can earn a higher credit rating.

Tanya Gorman Headshot
Phone: 408-316-3512
Dated: April 5th 2013
Views: 695
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