Applying for a joint mortgage? Here’s what you need to know about your credit scores
Quick insights
- When you’re applying for a joint mortgage, lenders will evaluate all applicants’ credit scores. The lower middle score between the two applicants is used, which can impact loan approval, interest rates and borrowing limits.
- If one partner has poor credit, there are several strategies to consider, including improving the credit score, applying individually or finding a co-signer to reduce lender risk.
- A joint mortgage involves shared financial responsibility and homeownership, while a co-signer takes financial responsibility without ownership.
Buying a home is one of the biggest decisions people make. You’ve probably kept careful track of your credit score and made sure not to do anything that could lower it. But what about your partner’s credit score? How does a credit score affect a married couple’s mortgage?
If you and your partner decide on a joint mortgage, both of your credit scores will matter to lenders. This guide will review how credit scores affect mortgage applications, how to calculate credit score on a joint mortgage and what to do if your partner has bad credit.
How do lenders use credit scores?
Lenders use FICO scores to determine a borrower’s level of risk.
Three credit bureaus—Equifax, Experian, and TransUnion—calculate an individual’s credit score. The higher your credit score, the better interest rate you’re likely to get—which also means you’ll have lower monthly mortgage payments.
Before you apply for a mortgage, it’s a good idea to check each person’s credit score across all three bureaus and review your credit report to make sure everything is correct.
Whose credit score is used on a joint mortgage?
A joint mortgage allows two or more people to purchase a home together, and both buyers fill out a joint mortgage application.
One of the main benefits of applying for a joint mortgage is that you’ll have more income to put toward your home purchase. Including two earners on your application means you may be able to borrow more money and you could potentially purchase a more expensive home.
If you’re buying a house with a partner, lenders will review both of your credit scores. Because of this, if one of you has bad credit, it can make securing a mortgage more difficult.
How is a credit score calculated on a joint mortgage?
On a joint mortgage, all borrowers’ credit scores matter. Lenders collect credit and financial information, including credit history, current debt and income. This helps them assess the total risk associated with lending to the group as a whole.
Lenders determine what’s called the “lower middle score,” usually by looking at each applicant’s middle score. For example, say your credit scores from the three credit bureaus are 723, 716 and 699, and your partner’s are 688, 657 and 649. Lenders will then use the lower of the two middle scores, which is 657.
This lower score is the most important to focus on, since it directly impacts whether you’ll be approved for the home loan, the interest rate you’ll receive and, sometimes, even the amount you can borrow. Lenders see a lower score as a higher risk, so you may face higher interest rates, stricter loan requirements or even a denial in some cases.
What if your spouse has bad credit?
The lower middle score system means both applicants’ credit scores matter, but the lower score holds more weight. Therefore, the decision of whether to include a spouse (or another co-borrower) on a mortgage application comes down to which option makes the most financial sense.
If your co-borrower does have bad credit, there are a few options available.
1. Improve your co-borrower’s credit score
If you’re looking to improve your credit score (or your co-borrower’s) prior to applying for a mortgage, here are some tips:
- Review credit reports regularly: Check your credit reports to make sure they don’t contain any errors. If you find any inaccuracies, dispute them.
- Pay off debt and reduce balances: Make sure all outstanding credit card debts are paid and that any remaining credit balances are below a certain threshold, since payment history, debt-to-income ratio and credit utilization are all significant variables that are factored into credit scores.
- Don’t take out new credit: Avoid opening new lines of credit before applying for a mortgage, as the age of your credit history is another important factor.
2. Find a different co-signer
Another option is to find another co-signer. Every lender has different rules for co-signers, so check to make sure you actually can work with a co-signer.
Working with a co-signer can be a good short or medium-term solution that allows you to get into your new home while giving you or your partner time to rebuild credit. Eventually, if you and your partner’s credit history improves, you can consider refinancing the current loan and take the co-borrower off the loan and add the partner with improved credit. Check with your lender for their refinancing requirements.
Remember, applying for a mortgage with a co-signer is not the same as using a co-borrower. A co-signer agrees to be responsible for the loan if you default, but they don’t have ownership rights to the property. In contrast, a joint mortgage involves a co-borrower who shares both the financial responsibility and ownership of the home.
3. Apply individually
In some cases, it may make sense to apply for the loan alone. There are a few things to consider here.
First, even if your house-hunting partner has a high income, a low credit score could offset the benefit that income provides. It limits your borrowing power, especially if your income happens to be lower.
Applying on your own doesn’t mean that you have to retain sole ownership of the home, either. That is, even if only one partner applies for the mortgage, you can still include both names on the house title, although you’ll want to work out who is responsible for what when it comes to paying back the mortgage loan.
4. Increase your down payment
If you’re able to, you may want to consider increasing your down payment. This reduces lender risk and may help you qualify for better loan terms even if your joint applicant has poor credit.
Assess your unique circumstances before you decide
Deciding to apply for a joint mortgage depends on which option will get you the best mortgage. On one hand, including the partner with bad credit could disqualify you for a loan. Even if you do qualify for a mortgage when one partner has bad credit, you might not qualify for a good interest rate.
On the other hand, applying on your own means the lender will only take into account your income and not your partner’s. This means you might qualify for a smaller mortgage. Again, regardless of whether one partner’s name is on the mortgage, their name can still be on the title of the home.
In summary
Understanding the ins and outs of credit scores and joint mortgages will help you and your partner take this major step together and get you closer to becoming homeowners.
For answers to any questions you might have about joint mortgages, give our home lending advisors a call. They’re happy to help.
