May 26, 2015
WiseBread quoted me in When It Makes Sense to Apply for a Mortgage Loan Without Your Spouse. It opens,
You and your spouse or partner are ready to apply for a mortgage loan. It makes sense to apply for the loan jointly, right? That way, your lender can use your combined incomes when determining how much mortgage money it can lend you.
Surprisingly, this isn’t always the right approach.
If the three-digit credit score of your spouse or partner is too low, it might make sense to apply for a mortgage loan on your own — as long as your income alone is high enough to let you qualify.
That’s because it doesn’t matter how high your credit score is if your spouse’s is low. Your lender will look at your spouse’s score, and not yours, when deciding if you and your partner qualify for a home loan.
“If one spouse has a low credit score, and that credit score is so low that the couple will either have to pay a higher interest rate or might not qualify for every loan product out there, then it might be time to consider dropping that spouse from the loan application,” says Eric Rotner, vice president of mortgage banking at the Scottsdale, Arizona office of Commerce Home Mortgage. “If a score is below a certain point, it can really limit your options.”
How Credit Scores Work
Lenders rely heavily on credit scores today, using them to determine the interest rates they charge borrowers and whether they’ll even approve their clients for a mortgage loan. Lenders consider a FICO score of 740 or higher to be a strong one, and will usually reserve their lowest interest rates for borrowers with such scores.
Borrowers whose scores are too low — say under 640 on the FICO scale — will struggle to qualify for mortgage loans without having to pay higher interest rates. They might not be able to qualify for any loan at all, depending on how low their score is.
Which Score Counts?
When couples apply for a mortgage loan together, lenders don’t consider all scores. Instead, they focus on the borrower who has the lowest credit score.
Every borrower has three FICO credit scores — one each compiled by the three national credit bureaus, TransUnion, Experian, and Equifax. Each of these scores can be slightly different. When couples apply for a mortgage loan, lenders will only consider the lowest middle credit score between the applicants.
Say you have credit scores of 740, 780, and 760 from the three credit bureaus. Your spouse has scores of 640, 620, and 610. Your lender will use that 620 score only when determining how likely you are to make your loan payments on time. Many lenders will consider a score of 620 to be too risky, and won’t approve your loan application. Others will approve you, but only at a high interest rate.
In such a case, it might make sense to drop a spouse from the loan application.
But there are other factors to consider.
“If you are the sole breadwinner, and your spouse’s credit score is low, it usually makes sense to apply in your name only for the mortgage loan,” said Mike Kinane, senior vice president of consumer lending at the Hamilton, New Jersey office of TD Bank. “But your income will need to be enough to support the mortgage you are looking for.”
That’s the tricky part: If you drop a spouse from a loan application, you won’t be penalized for that spouse’s weak credit score. But you also can’t use that spouse’s income. You might need to apply for a smaller mortgage loan, which usually means buying a smaller home, too.
Other Times to Drop a Spouse
There are other times when it makes sense for one spouse to sit out the loan application process.
If one spouse has too much debt and not enough income, it can be smart to leave that spouse out of the loan process. Lenders typically want your total monthly debts — including your estimated new monthly mortgage payment — to equal no more than 43% of your gross monthly income. If your spouse’s debt is high enough to throw this ratio out of whack, applying alone might be the wise choice.
Spouses or partners with past foreclosures, bankruptcies, or short sales on their credit reports might stay away from the loan application, too. Those negative judgments could make it more difficult to qualify for a loan.
Again, it comes down to simple math: Does the benefit of skipping your partner’s low credit score, high debt levels, and negative judgments outweigh the negative of not being able to use that spouse’s income?
“The $64,000 question is whether the spouse with the bad credit score is the breadwinner for the couple,” says David Reiss, professor of law with Brooklyn Law School in Brooklyn, New York. “The best case scenario would be a couple where the breadwinner is also the one with the good credit score. Dropping the other spouse from the application is likely a no-brainer in that circumstance. And of course, there will be a gray area for a couple where both spouses bring in a significant share of the income. In that case, the couple should definitely shop around for lenders that can work with them.”