Qualifying for a Joint Mortgage When the Co-Borrowers Have Bad Credit

By far the most common way for couples to purchase a home is to obtain a joint mortgage loan. With this financial arrangement, income is combined to provide the most favorable debt-to-income ratio, which, in turn, gives the borrowers the best chance of being approved. Credit scores help to determine the terms of a mortgage loan. Unfortunately, the bad credit of one person can diminish the chances of securing a joint loan. There are some avenues to explore if this is the case. Qualifying for a joint mortgage isn't necessarily precluded if there's bad credit in the picture. 

Possible Scenarios When Trying to Qualify for a Joint Mortgage

When trying to qualify for a home loan, it is most advantageous for both borrowers to have good credit, but this is not always the case. It makes sense for most people to put both of their names on a mortgage loan application in order to show the highest possible income. The more income, the greater the loan. However, should one of the co-borrowers have bad credit, his or her score gets tacked onto the loan, and a higher interest—if the loan is even approved—is the result.

Leave Bad Credit Off the Application

One option is to apply for a mortgage loan without including the name and financial information of the spouse with bad credit. This has a number of ramifications, though. First, the couple is limited to the income of the spouse whose name is on the application. Even if both people earn $50K a year for a total of $100K annually, the loan application only shows $50K, reducing the amount of the potential loan. Additionally, the spouse left off the application due to poor credit may not be listed as a co-owner, which could pose a dilemma should a divorce or death happen in the future. 

Co-Owner but Not Co-Borrower

Another possibility that some lenders may offer is for the spouse with poor credit to be listed as a co-owner of the home without being listed as a co-borrower. This can help to alleviate some of the potential problems that may arise if one partner is left off the title. 

Primary Applicant

In both of the previous two examples, the result couldn't rightly be called a joint mortgage since only one spouse is listed as the borrower. That being said, they are nonetheless options when one spouse has bad credit. Some lenders may allow borrowers to list both of their incomes while only running the credit score of the primary applicant. In order to quality for this arrangement, the primary applicant has to earn more than the co-borrower, otherwise the application won't be approved. 

Additional Loan Security

If the borrowers are able to put up additional collateral, such as another asset, or borrow against a substantial amount of money, such as a cash-value life insurance policy or 401K, a lender may approve the loan even if one spouse has bad credit.

The last recourse to a loan would be a sub-prime type, but considering the problems that have arisen in this industry plus the high interest rates, they are not advisable either for the lender or the borrower.