If you buy a house and apply for a mortgage with another person, everyoneâ€™s credit counts. This presents a dilemma when one applicant's FICO score is less-than-lovely: how to buy a house with credit problems.
You have a few solutions, depending on the cause of the low credit score and the overall strength of your application.Click to see today's rates (Mar 28th, 2017)
Unfortunately, you canâ€™t offset your co-borrowerâ€™s horrible history with your own pristine past. Even worse, itâ€™s the applicant with the lowestÂ "representative" credit score who determines how much the loan costs, or if you even qualify for financing.
What's a "representative" credit score? It depends. Mortgage lenders almost always pull a "merged" credit report that provides at least two and usually three credit scores from Experian, Equifax and / or TransUnion.
If there are two scores, they use the lowest as the "representative" credit score. With three scores, lenders use the middle one.
Before undertaking a doomed application,Â use a mortgage calculator to see if you can qualify for the loanÂ on your own. If your income is sufficient, you can leave your partner off the mortgage altogether.
You can always add her to the property title once the mortgage closes. However, doing this gives your partner some ownership interest in the property, while you would be the only one obligated by the mortgage.
Note that if you have joint bank and investment accounts, this money can be used for your down payment and counted as an asset on your mortgage application. Your partner will have to write a letter stating that you haveÂ access to 100 percent of the jointly-held funds.
Money in accounts that are solely in her name won't be considered assets available to you under most program guidelines.Click to see today's rates (Mar 28th, 2017)
If your income leaves you a little short of being able to qualify for a home loan, you still have options.
Fannie Mae and Freddie Mac lenders both offer a flexible program that allows eligible borrowers to consider income from non-borrowing members of their households.
Under these programs, lenders allow you to stretch the debt-to-income guidelines. Instead of maxing out at 43 percent, you may be allowed a debt-to-income (DTI) ratio of up to 50 percent.
For instance, suppose your application looks like this:
That's too high; you won't qualify for financing under most programs.
If your girlfriend has verifiable income of at least 30 percent of yours ($1,500 a month in this case), the lender can approve your loan. Your DTI can be as high as 50 percent.
These programs are not available to everyone. Your income must be high enough to qualify for financing, but not exceed program limits. These limits depend on the property location.
In most cases, the limit is 100 percent of your Area Median Income (AMI). This lookup tool from Fannie Mae lets you input the property address and determines its income limit.
Government-backed mortgages like FHA, VA and (sometimes) USDA offer more flexibility regarding credit scores. If your girlfriend has a low FICO because she has a limited credit history, you can probably get a home loan.
If her bad credit was caused by an event out of her control, you mayÂ overcome a low score. Or if her FICO is low because of bad debt management in the distant past, it may be overlooked.
You'll have better luck if you have a low DTI, an emergency savings account, and / or a larger down payment.
However, if your girlfriend's credit is a rap sheet of missed payments, charge-offs, collections and judgments, you won't be able to finance a house with her on the mortgage under these programs.
The good news is that government mortgage guidelines do consider the non-borrowing partner's income as a "compensating factor," and you may be approved with a DTI of up to 50 percent with your good credit.
Some lenders actually specialize in financing people in your situation. For instance, one San Diego-based lender allows FICO scores as low as 500.
You'll have to make a larger down payment (at least 15 percent), and interest rates start at about two percent higher than prime home loan rates.
You may be able to help your girlfriend improve her FICO scores and make her eligible for financing. Here are a few tips for rapidly increasing a score:
If her spending habits are not good, you might want to put off buying a home with her until she completes credit counseling or some form of financial education and gets her credit use under control.Click to see today's rates (Mar 28th, 2017)
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
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2017 Conforming, FHA, & VA Loan Limits
Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)