You may have waited for this moment your entire life: the moment when you own a home of your own.
You’ve spent years building up your credit score to 800, anticipating that a high credit score will nab you a low interest rate on a mortgage loan that may take 30 years to pay off.
And then, disaster strikes.
When you check your spouse’s credit score, it comes in at a lowly 620.
You might think to yourself, “Well, the average of my 800 and my spouse’s 620 is 710, so that’s not bad, right?”
The problem is that lenders don’t average credit scores like that.
Your loan approval chances, and the ensuing mortgage rate, will be based on the lower of your two credit scores, not the average.
So, what’s your best course of action in a scenario like this?
The good news is that all hope is not lost.
Even if your spouse has a low credit score, you might still be able to get approved for a mortgage - and you might even be able to snag a low mortgage rate after all.
As with any financial transaction, however, preparation is key.
The more you can understand how credit scores affect the mortgage loan application process, the better off you will be.
Here’s a look at some scenarios that might help you out of your bind when it comes to getting a mortgage with two different credit scores.
How Two Different Credit Scores Affect the Chance of Approval
Credit scores are a reflection of how you’ve used credit in the past.
From the perspective of a lender, your credit score is a numerical representation of how likely it is that you will default on a loan.
FICO credit scores are the creation of the Fair Isaac Corporation. They have long been the industry standard and are comprised of the following categories:
- Payment history, 35 percent
- Amounts owed, 30 percent
- Length of credit history, 15 percent
- Credit mix, 10 percent
- New credit, 10 percent
If you have a long and diverse credit history that shows a long record of paying off all your debts in a timely fashion, you’ll be rewarded with a high score.
Reducing the amount you owe will also have a large positive effect on your score.
FICO scores range from 300 to 850. Generally, you’ll need a score of at least 680 to get approved for a conventional mortgage.
Lenders will look at your credit scores from all three major credit bureaus: Experian, TransUnion, and Equifax. Typically, your credit score will be a bit different at each credit bureau.
When you apply for a mortgage, the median credit score is the one that will be used for your application.
Since lenders are in the business of making money, they want to make as many loans as possible. However, they only want to lend to people that they are fairly certain will pay them back.
Thus, from the perspective of lenders, credit scores are the gold standard.
If you have a high credit score, you’re likely to be approved for a good loan at a low rate.
However, in the case of a joint application, lenders will use the lower credit score as the basis for the loan.
So, if you’re applying for a joint mortgage with two different scores, your odds of approval, or of getting a decent interest rate, lie on the strengths of the lower credit score.
Can You Just Buy a Home in One Name?
One way to avoid the avoid the problem of having two different credit scores is to apply for a mortgage in one name only.
Lenders only consider the information on the application when evaluating a loan. If your stellar credit score is the only one on the application, your odds of approval will be higher than if you included a spouse with a lower credit score.
There’s always a catch though, isn’t there?
In this case, there is.
If you’re only using the credit score of one applicant, you’re also only entitled to use the single income of that applicant as well.
In other words, if your spouse earns $150,000 per year, you can’t include any of that income as a basis for repayment of your mortgage.
In most cases, this will reduce the size of the mortgage you can take out.
It might also impact your overall chances for approval.
But there is some good news. Even if only one person applies for a mortgage, you can still have both names on the title of the house.
Can Using Joint Assets Help?
When it comes to successfully applying for a mortgage, having a spouse with a low credit score can be a negative.
However, this doesn’t mean that your lower-credit spouse can’t still help you qualify for a good mortgage.
If your spouse has significant assets, he or she can transfer those assets into a joint account.
Then, you can use those assets as a basis for repayment when you apply for a mortgage in your single name.
Only your credit score and income will be used, meaning your spouse’s lower credit score won’t have any impact. However, your joint assets will boost your financial profile.
Essentially, you could use all of the good parts of your spouse’s financial profile -- his or her assets -- but you could leave out the negative of your spouse’s low credit score.
Remember to plan in advance if you choose to take this course of action, however.
Many lenders only accept “seasoned” assets or those that have been in checking or savings accounts for at least a few months.
So, expect to provide months or even years of financial statements. This makes it easy to see when large sums of money have magically appeared in an applicant’s account.
Lenders use this type of review to help weed out applicants who borrow or stash money in their accounts immediately before they apply, only to pay that money back or take it out again right after the mortgage loan is approved.
If you plan to pull assets from your spouse, or any other source for that matter, do it well in advance of when you apply for your mortgage.
Ways to Increase Approval Odds for a Home Mortgage
At the end of the day, a home mortgage is just a special type of loan.
Thus, the best way to increase your approval odds for a home mortgage are the same as you would expect when applying for any type of loan.
In short, get your financial house in order.
As odd as it sounds, it really is true that banks like to lend money to those who don’t seem to need it.
If you appear desperate for a loan, or if you’re trying to buy more house than you can truly afford, you’ll most likely get denied.
If, on the other hand, you can show a clean household balance sheet, with little or no debt and lots of assets, you’re more likely to get approved for a mortgage.
For starters, lenders will want to see a full diagnostic on your financial life.
Typically, you’ll need to show:
- Two years of W-2 forms
- At least a few months of pay stubs
- Documentation of prior mortgage or rental payments
- A list of all assets and debts.
Whether or not you already have a good credit score, you’ll want to demonstrate positive credit behaviors in the months leading up to your mortgage application.
At the very least, you should make all your payments on time and avoid taking out any new loans.
If you can take the extra step and pay down your outstanding debt, your credit score could tick up. This could save you thousands of dollars over the life of your mortgage.
If you have a lot of cash on hand, be willing to put up a larger down payment. The more cash a bank can secure upfront, the less risk they take over the life of the mortgage, increasing your approval odds.
Having a partner with a low credit score can be a drag when it comes to applying for a joint mortgage.
However, this doesn’t mean you have to abandon your dream of owning your own home.
In some cases, a simple juggling of your finances can do the trick. Pooling resources with your spouse, while leaving them off the application, might be enough to get the job done.
Another option is to work on your spouse’s credit score over time, making payments and reducing debt until his or her credit score is on par with yours.
Whichever path you take, having your finances in good shape is always important before applying for any type of loan, particularly a home mortgage.
Take the time to build up your cash reserves, pay down outstanding debt and show a steady and (hopefully) increasing income history before you apply.
With a little work, you can still get approved for a mortgage, even if you and your spouse have credit scores in two different categories.