You and your spouse are ready to buy that dream home.
On the mortgage application, lenders will look at both of your incomes, credit scores, outstanding debt, and more.
One of you may have bad credit and/or too much debt.
For this reason, you have to decide whether it’s better to apply for the mortgage loan alone, or with your spouse.
There’s no wrong or right answer.
Instead, it all depends on your situation.
Learn about the benefits and downsides of each approach to find out if you should apply for a mortgage with or without your spouse.
Applying With Your Spouse
Your mortgage lender bases affordability on your combined incomes.
So applying for a mortgage with your spouse could help you qualify for a bigger mortgage amount.
In most cases:
Your mortgage payment cannot exceed 28 percent to 31 percent of your gross monthly income.
Let’s say you apply for a mortgage alone and you earn $60,000 a year, or approximately $5,000 a month.
Your mortgage payment cannot exceed $1,550 (excluding taxes and insurances)
In such a scenario, you can afford to spend up to $305,000 on a home. This is assuming a 30-year fixed-rate mortgage with an interest rate of 4.5%.
Now let’s say your spouse earns $35,000 a year, resulting in a combined yearly income of $95,000 or $7,900 a month.
Applying for a mortgage with your spouse now qualifies you for a mortgage payment up to $2,400 a month, or a home purchase up to $475,000.
Effect on personal credit scores
Additionally, putting both of your names on a mortgage loan can help both of your credit scores in the long run.
A mortgage is a type of installment loan. And despite owing a large amount, it’s actually considered good debt.
So, having a high mortgage loan doesn’t hurt your credit score like a high-balance credit card.
Instead, each timely mortgage payment can gradually build a stronger credit score.
Adding a mortgage loan also diversifies your credit profile.
This can also improve your credit score. The mix of credit accounts is responsible for 10 percent of your credit score.
Applying Without Your Spouse
Of course, there’s no rule that says you have to apply for a mortgage with your spouse.
In fact, leaving one person’s name off the mortgage might be more sensible.
You might have an excellent credit score and the ability to qualify for the most favorable interest rate.
On the other hand, your spouse could have a much lower credit score.
Even if their score is good enough to qualify for a mortgage, it might not be good enough to get a cheap interest rate.
You have three credit scores.
Your lender uses the middle of your three scores when determining mortgage eligibility and terms. But when applying for a mortgage with your spouse, the lender uses the lower of your two middle scores.
So if your middle score is 802 and your spouse’s middle score is only 660, the interest rate you receive will be based on the 660 score.
This will likely result in a higher rate.
Effect on your mortgage APR
Paying a higher mortgage rate not only increases the monthly payment. It also increases how much you pay over the life of the loan.
If you can’t decide whether to apply with or without a spouse, run scenarios with your mortgage lender. They can help determine which makes the most financial sense.
Your mortgage lender can estimate your mortgage rate and monthly payment using the higher credit score, as well as the lower credit score.
Using the lower credit score might only increase the rate by a small amount. And this can have little impact on the monthly payment.
But if you end up paying a much higher rate, it might make sense for the person with the highest credit score to apply for the mortgage alone, providing their income is sufficient enough to qualify for the loan.
Protecting a couple's credit
You can also leave one person’s name off the mortgage to avoid potential damage to both credit scores.
Even if you have every intention of making your mortgage payment and fulfilling your obligation, unexpected events might make it difficult to afford your mortgage in the future.
This can include a job loss, an injury, or illness.
If you default on your payments and both of your names appear on the loan, both of your credit scores suffer.
But if only one person‘s name appears on the mortgage, this can potentially protect the other spouse’s credit.
And with one person maintaining a clean credit file, it might be easier to apply for future loans.
What to Consider With Regard to the Mortgage Deed?
When two people apply for a mortgage loan together, the mortgage lender will often insist that both parties put their names on the deed.
But what if only one person applies for a mortgage loan? Does only their name appear on the deed?
The short answer:
Your name can appear on the deed even if it isn’t on the mortgage loan.
A mortgage deed is a document that names the owners of a property.
If your name isn’t on the mortgage loan, adding your name to the deed gives you legal ownership.
And with equal ownership, your partner can’t sell the property without your permission.
When putting a non-borrower’s name on the deed, it is best to add their name at closing.
Depending on your lender, you could run into problems if you attempt to add a name later on. Some lenders don’t allow ownership changes unless the property is being refinanced.
However, in most cases:
Adding a name to the deed won’t be an issue, as long as an original owner also maintains ownership.
It’s not uncommon to add a current spouse, new spouse, or a child to a mortgage deed.
In the Event of Death or Divorce
If you decide to apply for a mortgage without your spouse, you might question what happens in the event of death or a divorce.
It’s important to have a candid conversation with your mortgage lender before closing, so you know what to expect in these types of situations.
But in most cases, if you die and your spouse’s name isn’t on the mortgage, the lender isn’t going to kick your family out of the home.
If your spouse’s name appears on the deed, they can continue to make the mortgage payment and live in the home.
For this reason, it also helps to have a life insurance policy.
This provides the surviving spouse with financial support to cover final expenses and everyday living expense.
Ideally, a life insurance policy should be enough to pay off the mortgage, or at the very least, be enough to pay the mortgage until the surviving spouse bounces back financially.
The situation, however, is quite different in a divorce.
If a couple divorces and only one person’s name appears on the mortgage, keep in mind that selling or refinancing is the only way to remove this person’s name from the home loan.
This isn’t an issue if you decide to sell. But sometimes, the spouse who doesn’t appear on the mortgage wants to keep the home.
The person who originally applied for the mortgage could agree to continue making the home loan payments and keep the mortgage loan in their name only.
They can then sign a quitclaim deed giving up legal ownership of the property.
However, keeping the mortgage in their name could make it difficult for them to qualify for their own mortgage after the divorce.
If this person would rather remove their name from the mortgage and the deed, the non-borrowing spouse would have to refinance the loan in their name to keep the house.
For this to work, this person must be in a position to qualify for the mortgage using their own income and credit.
Mortgage lenders allow applicants to include alimony and child support payments when applying for a mortgage.
So if this spouse receives support in addition to a paycheck, their income might be enough to qualify for the loan.
To include alimony and child support when applying for a mortgage, applicants must have a history of receiving on-time payments for at least six to 12 months prior to applying.
Also, payments must continue for at least three years from the date of the application.
They must also provide their mortgage lender with proof of this income.
This can include a divorce decree, a letter from the court, canceled checks, or bank statements.
You can choose to apply for a mortgage loan with or without your spouse.
Keep in mind that what works for one couple might not work for another.
So make sure you review all the alternatives and discuss the financial ramifications with your lender before making a decision.