Did you know that even if you’re married, your credit score and your spouse’s credit score are entirely separate? This is true no matter how long you’ve been together and even if you share all of the same accounts and loans.
If you want to use your spouse’s income to qualify for the loan, you’ll also have to use your spouse’s credit, for better or for worse.
Lenders use both partners’ credit scores, but a common myth is that they take the scores and average them, which isn’t the case. Instead, they do this:
Each applicant has three credit scores (one from each major credit bureau), and the lender looks at all of them. Let’s say the first applicant’s scores are 750, 730, and 715. Let’s say that the second applicant’s scores are 650, 630, and 615. The lender goes with the lowest middle score, which is 630 for this application.
Your loan’s interest rate will be based off of that lower credit score, and if you have very different scores, it can have a substantial impact on what kind of home you’re able to afford together.
If your partner has poor credit, you have a few options when you’re applying for a loan.
Using a partner’s income can really increase your chances of getting favorable loan terms and qualifying for the house you want.
The more income you use to qualify for the loan, the greater the dollar amount you’ll qualify for. This is because lenders won’t allow you to allocate too much of your income to your mortgage payment.
Your debt-to-income ratio (commonly called DTI) is the amount of debt you pay every month (including auto loans, credit card debt, personal loans, and your new mortgage) divided by your gross monthly income. This number is the number one way lenders verify that you’ll be able to repay the loan.
For example, if you have $10,000 in income every month but have $3,000 in monthly debt payments, your DTI is 30%.
An ideal DTI is 36% or under, though many lenders and loan programs will allow higher DTI ratios. Conventional programs allow upwards of 50%, government loans like FHA and VA allow 55% and even higher in some situations, but most jumbo loans are limited to 43% maximum.
Remember though, these percentages represent all ALL your debt combined. So the more credit card, auto, installment, student loan, or other debt you have, the smaller your mortgage payment can be, and the less of a loan you’ll be able to qualify for.
If your DTI is higher than the guidelines allow for the loan program you’re interested in, you have a few options:
Buying together can be complicated, and no mortgage scenario is exactly the same. If you’re not sure what’s right for your situation, I hope you’ll give us a call! We’re here to help you figure it out.
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