Mortgage Confidential: Co-borrowers' good credit won't erase your bad


Many moons ago, we in the mortgage business would sometimes hear the phrase, "I've got terrible credit but my Uncle said he would co-sign for me" and we would put together a financing package that would allow the nice Uncle to appear on the loan with the person who had the bad credit.

Lenders understood that, just like other consumer loans, if something went awry with the mortgage loan they could come after the Uncle for payment. But not anymore and it's been that way for quite some time. Unfortunately, many consumers aren't aware of this lending rule.

Lenders will use the lower of the middle scores for each borrower. If the three credit bureaus report your scores as 589, 550 and 545, then the lender will the middle score for underwriting purposes. If the Uncle's three scores were 810, 779 and 766 the score for underwriting purposes would be 779. That's a great score. But there are some misconceptions about these scores, that lenders average them together or they use the highest one or they use the one who makes the most money and so on. The lender will use the lowest of the middle scores and if 550 is too low for an approval, then no-can-do. Misconceptions can cause a lot of heartache. What do do?

The first choice would be simply to wait, repair the negative credit items and wait for your credit scores to heal. Or second, the Uncle could buy the property as an investment home with you being on title. You don't have to be on a mortgage in order to be legally recorded as an owner of the property. Your name along with your Uncle's name will appear on the title report for all future generations to see.

Real estate finance expert David Reed is president of CD REED Mortgage Bankers in Austin, TX and author of Mortgage Confidential: What You Need to Know That Your Lender Won't Tell You and Mortgages 101: Quick Answers to over 250 Critical Questions About Your Home Loan.