Loan Application Denied

Buying a Home When Your Partner Has Bad Credit

You pay all your bills on time and you work hard to earn more — so you can save more. Your credit score reflects your savvy money management skills, and you can proudly boast that you’re a member of the 730-and-up club.

Your partner? Not so much. Whether due to past actions or financial mistakes they’re currently working to correct, your love’s credit score is not something to write home about.

What’s a committed couple ready to settle down into a place of their own to do?

Before giving up on dreams of home ownership, take a look at the following options and determine what path makes the most sense for the two of you.

Ask why your partner’s credit score is low

Before trying to beg and plead with a lender to just give you the loan, ask why your partner’s credit score is less than stellar. If in the end you can chalk a bad credit score up to a mountain of consumer debt, you both might need to take a step back.

Buying a home isn’t a requirement — it’s an important decision, but it’s a big one — and trying to force the situation while one of you faces dire financial straits is a recipe for monetary disaster.

Step one: develop a debt repayment plan. Step two: look into home ownership later, when you each carry smaller liabilities.

If your partner has “bad” credit due to long-past transgressions, you each may benefit by taking action to improve their score before applying for a home loan. Start with these tips to boost a credit score (and score a better interest rate on that mortgage):

  • Check credit reports, look for mistakes, and correct errors if necessary
  • Make all future payments on time and in full
  • Keep your credit utilization ratio low (which means don’t run up a balance of $499 on a card with a $500 credit limit, even if you pay off that balance in full every month!)
  • Leave old accounts open, but don’t use them

Make the mortgage your own

Ready to buy a house now? It may make more sense to apply for a loan on your own instead of going in jointly with your partner.

Keep in mind that lenders look at your entire financial picture to determine whether you qualify. That means your own income, assets, and credit-worthiness need to meet the lender’s requirements without any help from other sources.

Before running down this road, ensure the monthly payments and other costs associated with home ownership are ones you can shoulder with your income alone.

While no one wants to think about worst-case scenarios, it’s your name on the dotted line — and you’re the one responsible for paying the mortgage if the two of you ever split up.

Plead your case

Although mortgage lenders may seem like faceless entities incapable of deviating from their set processes, there is room for you to explain your situation and provide all the facts.

If you can show your partner’s bad credit is due to factors that will not impact your reasonable ability to repay the home loan, the lender may approve a joint application despite a low score on one end.

Ask if you can write a letter of explanation for a low credit score. If the lender says it will consider your explanation, provide as much documentation to back up your reasons as possible. Consider including explanations and documents to show how, together, you and your love can reasonably make your monthly payments on your potential loan.

Consider a co-signer

If none of the above solutions works for your situation, you can consider asking someone to co-sign the home loan with you. Another person with a good credit score, sufficient income, and low debt-to-income ratio can help you qualify for the mortgage you want.

But you shouldn’t consider this option lightly. That other person will be financially responsible for the loan if you default.

To put it simply, co-signing can come with a lot of baggage. If co-signing makes sense for you, it’s an option — though you might want to think about other options first.

Love is blind, but mortgage lenders may not be so forgiving (or, well, blind to the realities of your financial situation). That doesn’t mean buying a home is out of the question, but do your research first.

If you can find a workable solution, take action and make your home-owning dreams a reality.

And if you both need to take some time to repair that bad credit score? Do that, and rest easier knowing your financial ducks will be in a row before you take on a mortgage.

 


credit score

Will a New Bill in Congress Help You Qualify for a Mortgage?

A new bill in Congress could significantly impact your ability to secure a mortgage by changing the way lenders look at credit scores.

Known as the Credit Score Competition Act, the bill is in its first stage of the legislative process. Although it’s a long way from becoming a law, future homebuyers have good reason to keep an eye on this bill. The bill would push for a new credit-scoring system, one that could potentially allow more buyers to secure funding. This is a big deal for those who have a low FICO credit score but are otherwise good home-loan candidates.

People with credit scores that do not meet FICO’s standards of “good” or “excellent” could be evaluated under different credit-score systems and therefore have their credit rated differently. In theory, this could help those buyers receive approval for a mortgage they might otherwise have missed out on. Because Fannie Mae and Freddie Mac own about 90% of the secondary mortgage market, and they’re allowed to consider only FICO scores, there’s no room for competition in the credit-scoring industry.

With such low competition, there’s no reason for companies to innovate.

This matters because not everyone has access to traditional forms of credit that beef up your FICO credit score (think steady income, bank accounts, assets, and months of credit-building history). Proponents who argue Fannie Mae and Freddie Mac should be allowed to look at new credit-scoring systems say FICO’s way of formulating credit scores is unfair to a number of groups, including first-time homebuyers, lower-income families, and minorities. The model currently used to score borrowers is based on data from nearly 20 years ago and excludes millions of people that companies like Experian say are creditworthy but whose scores don’t reflect that under the system in place today.

Credit-scoring models currently used in the residential mortgage process judge someone’s creditworthiness on a strict set of criteria but leave out factors that may indicate financial responsibility. For example, right now, FICO generally doesn’t take into account factors such as whether you pay your rent on time. Sometimes, that’s the only way first-time homebuyers can demonstrate they’re capable of handling a monthly mortgage payment. The current credit-scoring model also effectively punishes borrowers who don’t have much of a credit history; a short or nonexistent credit history can drag down overall scores. With this system, if you’re financially responsible, a diligent saver, and debt-free, you could still miss out on a mortgage because you don’t utilize credit in your day-to-day life.

Stay tuned to Credit Score Competition Act's journey through the legislative process!