Qualifying for a Joint Mortgage When the Co-Borrowers Have Bad Credit
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 1 applicant can diminish the chances of securing a joint loan. There are some avenues to explore if that 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 that 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 a co-borrowers have bad credit, his or her score is tacked onto the loan, and the loan is either declined or approved at a higher interest rate.
Leave Bad Credit Off the Application
An option is to apply for a mortgage loan without including the name and financial information of the spouse with bad credit. Doing so has a number of ramifications. First, the couple is limited to the income of the spouse whose name is on the application. Even if both people earn $50 thousand annually for a total of $100 thousand, 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 in case of future death or divorce.
Co-Owner but Not Co-Borrower
Another possibility that 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. It can alleviate some of the potential problems that may arise if a partner is left off the title.
In both of the previous examples, the result couldn't rightly be called a joint mortgage because only one spouse is listed as the borrower. That being said, they are nonetheless options when a 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 on a joint mortgage application are able to mortgage 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 mortgage, 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.