Let’s set the scene: You’re financially savvy. You pay your bills on time, save as much as possible, and follow a strict budget. You’re proud of your money-management skills and your stellar credit score, and you and your spouse are ready to buy your first home. But while your credit is “very good” to “excellent,” your spouse falls in the “fair” to “poor” range. Will your partner's less-than-desirable score keep you from obtaining a mortgage?

 

Understand how credit is weighed

First, it’s important to understand the role your credit score plays in securing a home loan. Credit is one of the “3 Cs of underwriting,” along with capacity and collateral. Capacity is your ability to pay back the loan — debt-to-income ratio, employment status, cash reserves, number of borrowers, etc. Collateral refers to the property being purchased, including the borrower’s down payment, the property type, and property use. If there are major issues with one or more of the “3 Cs”, the loan may not be approved.

When it comes to credit, lenders look at your FICO score. FICO stands for Fair Isaac Corporation, a company that developed a method for calculating credit scores based on information from the three major credit reporting agencies: Experian, Equifax, and TransUnion. Because the data at each agency can be different, your FICO scores may be different. When applying for a mortgage, your lender pulls a combined mortgage credit report from the three agencies and uses the middle number as your score for determining qualification.

So, if your score is 740 and your spouse’s is 620, you can just use the higher number, right? Unfortunately, that’s not how it works. Eloy Martinez, senior loan officer with American Portfolio Mortgage Corp, says when evaluating a couple’s creditworthiness, lenders pay attention to the lower score.

“When there are two borrowers, we always look at the lower credit score, even if that applicant isn’t the primary breadwinner,” he said. “But there are several variables that make up a borrower’s credit score, and we also review the couple’s overall financial profile, so don’t assume your spouse’s lower score will automatically mean a denial.”

 

Decide how to apply

When applying for a mortgage with a significant other, you do have the option to apply either as a single applicant or as joint applicants. In some cases, it may make more sense to apply for a loan on your own instead of going in with your partner. If you’re the primary or only income earner, that may be the better option. But if you’re not, and you need your partner’s income to qualify, it might be worth the risk of including them on the application.

But before applying individually, experts say it’s important to ensure that the monthly mortgage payments and other homeownership costs are expenses you can handle alone. Nobody wants to think about the worst-case scenario, but if your name is the only one on the loan, the responsibility will be yours alone if you and your partner split up.

 

Look at your options

As mentioned, credit score is just one factor considered in a mortgage application. If other pieces of your spouse’s financial picture are strong, a not-so-great score likely won’t hold you back.

“And we’re also looking at the type of credit problems,” said Martinez. “If your spouse was dinged because of a couple of late payments, but they have a strong debt-to-income (DTI) ratio and $200,000 in their 401k, they’re in a much better position than someone with that same score, but with little savings and a high DTI.”

Experian says another tactic that could reduce the impact of your spouse’s bad credit is making a larger down payment, which shows the lender you won't have to borrow as much. The credit reporting agency also adds that “many lenders offer programs for first-time homebuyers that tend to be more lenient with credit criteria.”

 

Consider taking a step back

If you’re not in a rush, another option is to put the home buying process on hold in order to improve your spouse’s credit. Start by reviewing a copy of their credit report. You’re entitled to a free report every year through www.annualcreditreport.com. Experian says to “make sure there aren’t any errors that could be bringing down your spouse’s credit scores,” adding that “if there are any mistakes on the report, dispute the errors to get them removed.”

If everything looks accurate, be sure your partner is paying all bills on time as payment history is one of the most important factors in calculating credit score. The credit utilization ratio is also a big consideration. This number shows lenders what percentage of your available credit you’re using, and Experian suggests keeping utilization below 30 percent or, ideally, below 10 percent.

“The better the score, the more opportunities you have,” said Martinez. “And sometimes just bumping your spouse’s score up a bit can change the whole landscape.”

 

Talk to a professional

There are still a lot of mortgage misconceptions out there, so before you assume your spouse’s credit will keep you from fulfilling your homeownership dreams, it’s worth a conversation with a local, professional lender.

“I think fear and assumptions really keep people from a lot of opportunity,” said Martinez. “Potential borrowers would do themselves a great service and save themselves a lot of time, if they would have that initial conversation to discuss their options. Even if it means they must wait awhile, they’ll at least have the information and be able to develop a plan for the future.”

For a list of experienced, area lenders, visit the Greater Lansing Association of REALTORS® website at www.lansing-realestate.com.