Most couples apply for mortgage loans jointly. But what happens when one of them has bad credit?

Bad credit can be a real problem when there are joint mortgage applicants. Typically, the lender looks at the lowest of the two credit scores when deciding what interest rate to charge, so if your spouse has bad credit, you could really get socked in that department.

Qualifying with only one person

 

On the other hand, if the higher income borrower has good credit, that's usually sufficient to qualify for the mortgage itself. The higher income person is always regarded as the primary borrower.

Having two borrowers on a mortgage application can help you qualify for a bigger loan, since you can combine your earnings in figuring your debt-to-income ratio. But if one of them has bad credit, that might not be in your best interest.

If the good credit partner/spouse has enough income, you might consider applying under just his or her name. You might not be able to borrow as much and may have to limit your choices of homes, but this is the most straightforward approach.

Bringing in a new co-signer

 

If you need more income to qualify for the loan you want, you might consider bringing in a different co-signer. A parent or other close relative, for example. Their good credit can stand in for the bad credit of your spouse or partner, while boosting your combined income. If you're considering an FHA mortgage, the co-signer must be related to you.

A few words of warning, however. First, if your new co-signer earns a higher income than you do, the lender will want to list them as the primary borrower - which your new co-signer may be unwilling to do. Second, your new co-signer has to be willing to tie up a big chunk of their credit in backing your loan, because they'll be held responsible if the loan defaults. Finally, the co-signer needs to be sure that you and your partner can be counted on to keep up with the payments - remember, there's a reason your beloved has bad credit - so don't be too upset if Mom or Dad are reluctant to go along with this.

Legal issues

 

If you decide to apply for the loan under one person's name, you can usually still have the deed to the property under both names - the deed and mortgage are separate. However, the lender will have some say in this, so check with their policy first.

Also, if only one of you is going to be named on the mortgage, but both will be contributing toward the cost, it's a good idea to have an agreement in place for the disposition of the home in case there's a split - particularly if you and your partner are not married.

Published on October 27, 2011