Credit is Everything (When it comes to buying a home)
Your credit history can be the only thing that helps, or stops you from getting that mortgage loan. A great credit score can make all other parts of your application look better than they really are. On the other hand, having a steady income, a huge down payment and other pluses cannot cover up a horrible credit rating.
Simply put, better credit scores will most likely mean better mortgage terms for you. So what do you do when your credit history is flawless, but your wife, husband, girlfriend, fiance, partner or roommate’s…isn’t?
This happens fairly often and many people have managed to get past it using tips like the ones we provide below. If you know what to do, you can still end up with your dream house even if your partner has terrible credit.
Understand How Lenders Determine Your Score
The first thing you need to do to get approved is to understand how lenders look at applications involving two borrowers. They don’t add the two scores together, or take an average. Instead, they use what is called the “lower mid score” of the two borrowers.
Each person will have 3 credit scores, one from each of the larger credit bureaus. The lender will look at each score and take the middle one. The lender will then use the lower middle scores.
For example, if person A gets the following scores from the bureaus: Experian (725), Equifax (715), Transunion(699) and person B gets the following: Experian (688), Equifax (652), TransUnion (644). The lender will use then take middle each person’s middle score. In our example, person A’s score will now be 715 (from Equifax) and person B’s will be 652 (from Equifax).
The lower score is 652, which will be the lower middle score used for person A and B’s application. Fortunately, there are a few ways to qualify even when your partner’s score is less than ideal.
Understand Your Partner’s Credit
Sometimes, even the companies recording the credit make mistakes. You need to look through what’s on your credit report thoroughly to make sure there are no errors. It’s easier than ever to access your credit report; all 3 bureaus will give you one free report per year. Ensure that both you and your partner’s reports are free of errors. To show you just how important this is, it has been found that an error in your credit can cost you up to 100 points. That could easily be the reason your mortgage loan gets rejected. Errors can be removed quickly using what’s known as a rapid rescore.
Another tactic is to limit the use of your credit cards. The bureaus will compare the amount of credit you have used to the total amount available to you. Make sure your credit card balance is less than 30% of your total limit.
One strategy that can have a strong, instant impact on your partner’s score is for him/her to become a signatory, or authorized user on a credit account with good-standing. The account can belong to you or anyone else–as long as it’s in good-standing. Your partner is basically borrowing someone else’s excellent track record, which can hike up a lower score.
Take Your Partner Off The Loan
Having two borrowers can help you get a much larger loan as two incomes are often preferable to just one. However if one of the partners has really poor credit, he/she can ruin the chances of the loan being approved. If that is the situation you are in and all the tips above haven’t brought your partner’s score to an acceptable number, it might make sense for you to apply for the loan by yourself.
If the partner with better credit is also the one with a higher income, that could work well. All you would have to do is ensure that you can still get a mortgage of that size on one person’s income. Both partner’s names can still be on the title deed of the house regardless of who paid for it.
The only issue might be the size of the down payment. Fortunately, the partner that’s been taken off the loan can give the other person the down payment money as a gift simply by sending authorizing gift letter. Problem solved!
Ask a third party to co-sign
If you have a relative with a stainless credit history, it might be a good idea to ask them to co-sign your application. By co-signing, this person will be agreeing to take responsibility for the repayment should the principal borrower not be able to pay. Each lender will have their own rules for adding a co-signer, so you will have to check to see whose policies will suit your situation.
In many cases, having a co-signer can significantly increase your chances of getting that dream house. Often, you only need the co-signer for a short time at the beginning of your term. It’s a great in-between solution that will satisfy the lender’s needs and give your partner time to improve their credit score.
Of course, every situation is unique, but it is possible to add your spouse on after a year or two and refinance your relative off the mortgage loan.
Your partner’s low credit score shouldn’t be what stops you from getting a loan. – Find Out What You Qualify For Here – A free credit analysis will get you all the answers you need for your home shopping.