Your credit score is one of the most important factors lenders check when reviewing a mortgage application. The higher your scores, the more likely you are to be approved with the most favorable terms. Lenders look at the middle of your three credit scores when deciding what interest rate to charge, and when two borrowers are involved in a loan, the lowest of the two credit scores is used. So if your partner has bad credit, you can end up with a significantly higher mortgage rate.
If you and your partner are married, there is a good chance you will apply for your mortgage loan together. But what happens if one of you does have bad credit?
Can you qualify with only one person?
In most cases having two borrowers on a loan application can help you to qualify for a larger loan amount. But, if one of the borrowers has bad credit, that might affect the whole loan qualifying process.
If this is the case, it might be wise to remove the “weaker” borrower from the loan and apply only using the borrower with higher credit – just make sure your debt to-income ratio still qualifies.
There is a chance you will not be able to get same loan amount as you would qualify for together, but in certain cases it can be the only way to achieve financing.
Also, it’s important to know, that even if an individual is not a borrower on the loan, they can still be recorded as an owner of the property on title.
What about adding a co-borrower?
If you are lucky enough to have family members or friends who are willing to co-sign on your mortgage, you might be able to qualify for a higher loan amount, using a non-occupant co-borrower (a borrower that does not live in the house) to replace the lower credit score partner – this is a great option as well.
When using a non-occupant co-borrower, make sure they have a good credit score – a lower credit score will increase your interest rate; and remember, if you are applying for an FHA loan make sure this borrower is related to you (it’s a requirement).
Make sure your co-borrower is aware of the risks co-signing can entail – if you or your partner stop paying the mortgage it become the co-borrowers responsibility to take on the mortgage payments, and missing a payment can have extremely detrimental effects on their credit score.
In the meantime, keep working on boosting your partner’s credit score so later you can refinance the loan and relieve your co-borrower of the responsibility.
Tips for credit score improvement
If you want to boost your credit score, there are 3 basic tips you have to follow:
- First, try to maintain a healthy mix of credit types.
- Second, always pay your bills on time
- And third, periodically increase your credit limits
Improving your credit scores takes time, but the sooner you address the issues keeping it down, the faster your credit score will go up.
Every story is different and learning all the options available to you and your partner is the first step. Try not to rush into financial decisions, and make sure you feel comfortable not only paying your mortgage, but also maintaining your day-to-day expenses and overall quality of life.
If you’d like to learn more about applying for a mortgage with low credit or how to improve your score, we have a team of professionals waiting to help.