House Hunting When Your Credit is Fine, but Your Partner's Isn't
Or so they thought.
Despite Capps' steady income, his credit score came up as "not
Myrlin Hermes and her boyfriend, Jeremy Capps, knew the kind of house they wanted to buy in Portland, Ore., and had an idea of how much home they could afford. Hermes, a novelist, has an excellent credit score of 765. Capps earns a solid living as a network engineer for Intel. Their mortgage prospects looked bright.
Or so they thought.
Despite Capps' steady income, his credit score came up as "not available." According to Hermes, he had no credit cards, and had never bought a car on payments. In other words, there was nothing to assure lenders that Capps was creditworthy. "We thought living within your means was supposed to be a good thing, but now we're stuck renting for another year or two, at least while he tries to build up a credit history from scratch."
It's a common scenario. One has stellar credit, the other has no credit or, worse, poor credit, throwing home plans into disarray.
Couples can combine bank accounts and assets, but they can't combine credit scores. Each goes into the partnership with an individual credit history and, sometimes to their surprise, discover that having disparate credit scores can and does affect their borrowing power. One good credit score does not outweigh the bad, and a sizable combined income is not always enough to set things right.
"For the most part, all mortgage programs are going to take lowest of the two-partner score," says Jeri Lynn Fox, president of the Illinois Association of Mortgage Professionals and President-Broker/Owner of USA Mortgage Corporation in Elmwood Park, Il.
Many couples become disheartened, thinking they've got few good options. But the news is encouraging. Even if your better half has a questionable financial record, there are strategies for keeping the home-buying dream intact.
The most important thing? Don't be blindsided. Know your creditworthiness before you begin the process. "Find out what your credit rating is and if there are any challenges," urges Fox. "If you don't give yourself time, you'll be forced into less pleasant choices."
For one thing, you could find yourself throwing money away. Fox has seen couples make offers on homes without knowing their credit ratings, hire attorneys and pay for inspections only to find out after they've laid out the money their mortgage was denied.
Establish a Game PlanBy finding out your credit score and consulting with a mortgage professional early on in the process, you can explore options for establishing a credit history or improving your credit score.
In an era of credit tightening, individuals who simply have no credit history are considered mortgage risks. Those who haven't used credit cards or taken on, say, car or school loans have not yet proven to lenders they can manage credit responsibly. That's typically a situation that can be remedied in a relatively short period of time, as few as a couple of months. Sometimes a mortgage professional can even help prove an applicant's worthiness by providing a lender or underwriter with an alternative means of credit history such as a cell phone, cable, car insurance or utility bill, says Fox. Otherwise, it's a matter of building up a credit history by applying and using credit cards, paying down the debt and paying them off on time.
Remedying the situation in which a partner has poor credit score is more challenging. If the derogatory credit is tied to a specific reason, such as a temporary illness or short-term job loss, lenders may look more kindly on the situation.
Get Your 2010 Credit Score
Mortgage-seekers on the bubble should consider a portfolio lender such as a credit union or community bank, says Louis Spagnuolo, vice president mortgage banking of WCS Lending LLC in Boca Raton, Fl. Portfolio lenders have their own loan products and set up their own guidelines. "They can use compensating factors to make up for one of the spouse's credit score. They have more latitude, and they look at the broader picture," he says.
Spagnuolo also counsels clients with challenging credit scores to pay down their credit card balances and contest anything derogatory being reported on their credit report. "A lot of times that helps raise credit scores 40 to 100 points," he says. The threshold score limit under which you are not considered creditworthy for a mortgage is generally 620, so a big boost to your score can make the difference between obtaining a mortgage rate at a lower interest rate -- or obtaining a mortgage at all.
Going it Alone
A partner with good credit can go it alone as long as the single salary is sufficient to support the mortgage. Fox cautions there may be ramifications relating to the title of the home and future credit rating of the spouse left off the mortgage. "In some states, it's not as easy as it sounds so check with an attorney about implications you might face later on."
Another option? Find a co-signer, such as a close family member, who will agree to guarantee the loan in the case of a default. The co-signer is liable for repayment until the loan is satisfied, which means it's not a commitment to be taken lightly.
The important thing to keep in mind is it's not always necessary to postpone your dream. "People get discouraged because they're not informed and they give up. There's definitely hope and definitely options," Spagnuolo says.
In the meantime, Jeremy Capps is building a credit history. He obtained a secured credit card, tied to his savings account. In addition, Hermes added him as an authorized user on her credit card. The plan is to make payments on time and "hope Jeremy will at least be a blip on the radar, enough to qualify for a loan, even if it is at a higher interest rate," she says.