Maybe you knew going into your marriage that your spouse had a poor credit score. Maybe you didn’t, though. Either way, the end is the same. You may have trouble securing a mortgage. Before you subject yourself to renting for the rest of your life, consider these steps.
Apply on Your Own
Many couples assume double income is necessary for loan approval. It may not be. Obviously, it depends on your financial situation. How many debts you have play a role. The size of your impending mortgage payment also matters. Determine if you can afford the payments on your own. Start with the mortgage payment. Does it take up 28% or less of your income? Lenders look at your gross monthly income. If it’s slightly higher, government-backed programs might be a better choice. For example, FHA loans allow front-end ratios of 31%.
If you can comfortably afford the mortgage payment, look at your other debts. Conventional loans require total debt ratio maximums of 36%. Your credit card and various loan payments plus the new mortgage payment can’t exceed 36% of your income. FHA loans allow a total debt ratio of 43%. If your DTI exceeds either number, see what you can pay off. If your personal or auto loans only have a few months left, consider waiting until they are paid off. If you can pay off a credit card or two, that may help as well.
This is the easiest way to secure a mortgage with a spouse with poor credit. If you simply can’t qualify for the payments on your own, try the steps below.
Help Your Spouse Work on His/her Credit
This process takes longer. Applying on your own is the quickest solution. If you need your spouse’s income, though, he/she needs a better credit score. Try the following:
- Pull his/her credit report. Go over it and look for errors. Mistakes happen. Unless you find them, though, they remain on the credit report. Provide proof that the information is incorrect to all 3 credit bureaus. You should also contact the creditor reporting the information. Within a few weeks they should have an answer for you regarding the error. If it gets fixed, your credit score may improve in a month or two.
- Bring all accounts current – Late payments hurt credit scores. Help your spouse bring all accounts current. A history of consistent, on-time payments can help increase his/her credit score. This takes time, though. One on-time payment isn’t enough. Just stay consistent and the score should rise.
- Lower utilization rate – The more outstanding credit your spouse has, the lower his score. Help him/her lower the rate to just 20% of the available credit. It may take time to get the debts paid down, but their credit score will benefit quickly.
Provide Compensating Factors
If you need your spouse’s income and the credit score is still low, there are other ways to qualify. If you can provide compensating factors, it can make up for the lower credit score. The most common compensating factors include:
- Large down payment – The more money you invest in the home, the lower the risk for the lender. Even if you use a program that requires a small down payment, put down more. This shows the lender your seriousness in purchasing the home. It also shows financial responsibility despite the lower credit score.
- Work on your debt ratio – Just because your spouse has a low credit score doesn’t mean you need a high debt ratio. Low credit scores happen for a variety of reasons, including not paying bills on time. Try paying off debts before you apply for the mortgage. The lower your debt ratio, the better chance you have of being approved. Just because a program has a maximum DTI doesn’t mean you should meet the maximum. Try coming in below it for better chances of approval.
- Consistent employment –Staying at the same job for at least 2 years provides reassurance for a lender. A borrower that changes jobs frequently shows inconsistency and risk. If you both have consistent employment, it can help your chances of approval.
Provide Reasons for the Low Credit Score
Sometimes credit scores fall due to circumstances you can’t control. If your spouse suddenly lost his/her job, became ill, or had another tragedy, tell the lender. Any proof he/she can provide will help the lender understand the situation better too. Some lenders may allow exceptions if there is ample proof of circumstances outside of your spouse’s control. Of course, it helps if you have compensating factors and good credit moving forward. Special circumstances should be those that were temporary and that your spouse was able to recover from quickly.
Most importantly, you and your spouse must work together. Be open and honest with lenders. Let them know the situation up front. If there is a bad credit score, ask the loan officer what options you have. Sometimes lenders have more options than you realize. Gather all necessary proof and be ready to answer some tough questions. In the end, it may help you secure the mortgage you want.
Getting approved for a mortgage with a spouse with bad credit isn’t impossible. If conventional and FHA loans don’t work, there are other options too. Alternative documentation loans and subprime loans offer possibilities. They don’t charge outrageous interest rates or fees, like many people believe they do. You just need to choose what works for you. Talk to several lenders to determine your options. Then compare your available options. Taking a conventional loan with a higher interest rate can be more expensive than a loan from a private lender.
Consider your options, compare the Loan Estimates and make the decision that works for you and your spouse. Remember, your mortgage is something you may have for the next 15-30 years. Put ample thought into your choices before taking out a mortgage.