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.
6 Ways to Buy a Home Even if You Think You Can’t
There are many obstacles when buying your first home. It takes diligent work, and to say the least it is expensive. Especially when you consider the rise of real estate and interest rates. Here are six issues that I am sure you have heard will get in your way. However, I have good news for you, there are ways around them.
- The big 20% down payment
The standard in buying a home is 20 percent money down, which means a lump sum of 20% of the purchase price paid upfront. On a 300,000 house, the down payment would be at $60,000, which is definitely not pocket change. Putting down 20% will allow you to have a lower mortgage and monthly payments. However, according to the National Association of Realtors, 81 percent of Americans purchased their first home with less than 20 percent down to as little as 3 percent. Here are some alternative options to come up with a down payment that would get you near the 20% percent mark. One option is to go to your family and ask for a gift. You can get up to $14,000 tax-free money from your mom, dad, and even your grandparents. If all 4 of them decide to bless you with a gift, that is $56,000 tax free money that can go towards your down payment.
Another option that many people take advantage of is borrowing against their 401(k) or IRA. You are able to borrow up to $50,000, or 50% percent of your plan. First time homebuyers may qualify to take up to $10,000 from their IRA without having to pay early withdrawal penalties.
Now let’s say with all of that, you still don’t have enough money. If you have always dreamt of having a big lavish wedding as a child, you can always skip out on asking for that fancy blender and new 70-inch TV, and request money from your guests instead.
Another possibility is to completely skip on having the big wedding in general, and maybe opt to have something smaller and more intimate. This will surely save you a lot of money that you could be putting down on your first home.
- Bad Credit
This might be the biggest obstacle of all when buying a home. The lower a credit score, the higher the interest will be or you might not even qualify at all. The best thing to do is to clean up your credit as much as possible, pay your bills on time, and consult with a mortgage broker for suggestions on how to improve your score. A few things that a mortgage broker will tell you is to not incur more debt. Hold back on purchasing a new car and completely avoid opening up new lines of credit. Lastly, know your credit score inside and out. According to the National Foundation of Credit Counseling, 42% percent of Americans have not checked their credit score in at least 12 months. The two most important credit scores you need to know are 620 for the Federal Housing Administration for your insured loan, and 720 for a conventional loan.
- Knowing your price range.
A standard rule to determine your first homes price range is to figure out how much you can afford each month. Lenders say your PITI (principal, interest, taxes, and insurance) should not be more that 28% percent of your income before taxes. Some banks will go up to 33% percent which means if you earn $5,000 per month, the maximum PITI payment the lender will allow is $1,650 a month. Banks are looking for your back-end ratio; the sum of your PITI payment and all revolving debit (credit cards, car loans, all other loans you carry), which should be no higher than 41% to 50% percent of your gross monthly income.
- Fear of a bad loan
For many years a 30-year mortgage with a fixed interest rate was the only option. In recent years the industry has changed exponentially and developed new programs to help more people become homeowners. Some loans begin with a low interest rate and adjust upward by a certain percentage about every year. Many people choose to go with a low interest rates at the beginning of the loan and sell the house for income before the loan adjusts. Consult with your mortgage broker to find out what will be the best for you.
- Where to begin
Some first-time buyers think spending hours on Zillow and going to every open house is the best way to start; but its not. The best way to begin is to get educated. Fannie Mae and Freddie Mac both offer classes and a lot of information on their website that can support you through the process.
Some basics:
Real estate brokers work on a commission base, typically around 6% percent. There is no need to pay any fees upfront to an agent for them to help you walk into a house to check it out. If and when the property is sold they will get paid.
A house on the market for a long time does not necessarily mean it has any serious flaws. The seller may have an unrealistic expectation of the value of their home, or it could be something else. Don’t be afraid to offer lower and let your agent negotiate on your behalf.
You will see that every home will come with some type of issue large or small.
Unless you’re buying a brand new home, you should expect some fixing up to do. Now it’s up to you to decide the extra costs are worth buying the home.
- The offer is made and now I’m scared
You found the home of your dreams and you make your offer. This offer should come with at least two contingencies. 1. You’ve had the chance to have a private professional inspector come out and look at the property. If the inspector finds issues that are out of your budget to fix, you can always negotiate the purchase price or walk away. 2. Your offer is based on the ability to pay for the property. If for some reason you are not able to pay then you can simply walk away. After all negotiating is said and done, you and the seller will go into a process called escrow. That is where a third party will make sure all of the legalities are in excellence before completing the sale. Escrow will handle the money components, and seal the deal between you and the seller. Congratulations, you are now a first time homeowner!
Now that you know what it really takes to achieve the American Dream of homeownership, give us a call and we'll walk you through the process in no time! 702-331-8185