When a couple decides to buy a house together, it’s a very important step in their life journey. There’s lots to do from gathering all the paperwork, to applying for a preapproval, to shopping for a new home, and plenty of stuff in between. It’s certainly a big decision, especially for a couple buying their very first home. One of the main qualifying factors is credit. Lenders want to make sure the applicants have demonstrated both the ability and willingness to pay off debt. The credit evaluation process is what makes the determination in these questions.
Three-digit scores are provided by all three of the main credit repositories of Experian, Equifax and TransUnion. While all three use the very same algorithm, rarely will these numbers be exactly the same. Some businesses don’t subscribe and report to all three. Different regions can also affect the timing of the reported information.
And, businesses won’t report credit payments all at the same time. But they will be similar. For instance, a credit report might show three scores of 690, 730 and 725. Of these, lenders will throw out the highest and the lowest score using the middle score for qualifying, or 725 in this example. But what if there are two people on the same application?
In that scenario, the lender pulls credit for both applicants along with their credit scores. Again, using the same example, one applicant has a qualifying score of 725. The other applicant’s scores read 710, 724 and 760. The middle score of these is then 724. Now we have two qualifying scores, 724 and 725. The lender will then use the lower of the two for qualifying. Sounds simple, right? Well, sometimes a problem can present itself.
Let’s say the second spouse has credit scores of 550, 570 and 515. Of these three, the qualifying score is 550, too low for most programs. The first step to normally follow is signing up for credit counseling. But that takes time. What if there is a house the couple wants to buy now? Should they stop everything and wait a few months for credit to improve? The answer, surprisingly, is no.
There’s a term in the mortgage industry referred to as a “non-purchasing spouse.” This means one spouse will be on the mortgage application and the other left off. Doing so removes the damaged credit from the application altogether. But the non-purchasing spouse can still be on the title showing evidence of an ownership interest in the property just not on the mortgage.
The tricky part is making sure there is enough income for the purchasing spouse to qualify for the new mortgage. If both incomes were needed in order to qualify for the home they want, that’s going to be a challenge. But, if the purchasing spouse can qualify using his or her own income, there’s no need to put the other spouse on the loan application. Or, perhaps putting more money down in order to lower the loan amount to the level where the purchasing spouse can now qualify.
Damaged credit doesn’t have to stall the home purchase process. As long as the spouse with the better credit has enough income to justify the loan, the deal can still go through.