When you and your spouse are buying a home, your credit scores and histories will be considered by potential lenders. In fact, your credit score will determine the interest rate offered — or, if your spouse’s score is too low, it could prevent the two of you from securing financing altogether.
However, even if your spouse has terrible credit, you might still be able to buy the home of your dreams. Here’s how to secure a mortgage loan with bad credit, and tips for raising your credit scores.
Joint vs. Single-Applicant Mortgages
You might have a similar take on your finances as your spouse, but a few financial missteps in his younger years can be weighing down your spouse’s credit score, and affect your ability to qualify for a home mortgage. If you’re not sure whether you should apply for a mortgage together, here’s what to consider.
When you apply for a home loan, your spouse’s and your credit scores and history are taken into account. If you have good credit but your spouse’s credit is less than stellar, you might find your mortgage application being denied — or coming with a hefty interest rate.
Although many couples find they need the income of two people on a mortgage contract to obtain approval, some lenders allow individuals to obtain a mortgage on their own. This can be a good option for couples that would not otherwise qualify for a mortgage together.
If you’re unable to qualify for a home loan on your own, or your spouse wants to be on the mortgage, you’ll need to work toward improving your credit scores.
How to Improve Your Credit to Get a Better Mortgage Rate
Many mortgage lenders today look at your spouse’s credit score and your credit score and history as one factor in determining the interest rates you’re offered. Borrowers with lower credit scores typically pay higher rates since they’re assumed to be high-risk borrowers.
If your credit score is low due to financial mistakes you’ve made in the past, your goal should be to increase your FICO score so you can nab the best mortgage rate. The good news is that with some work, any married couple can get their credit scores raised and improve their chances of obtaining a better mortgage interest rate — which can save tens of thousands of dollars over the life of the loan.
Here’s what you can do to improve your credit score:
- Remove errors from your credit report: The first thing you and your spouse should do is review your credit scores and reports. Make sure your reports are error-free. If they aren’t, contact all three credit bureaus with the proper documentation to correct them.
- Improve your debt repayment history: Set up automatic payments to avoid late payments. If your credit score is damaged from previous late payments, ask for a goodwill adjustment from your creditor, which can have previous late payments removed from your credit history.
Buying a House With Bad Credit
Even if you have bad credit, you can still make yourself an attractive borrower to potential lenders by setting the numbers up in your favor. Your down payment, debt-to-income ratio and loan-to-value ratio will influence whether you qualify for a mortgage. Here’s what you’ll need to do to buy a house if you have bad credit.
Build Up Your Down Payment
Money talks, and if you build up a sizable down payment, it says you’re serious about owning a home. Besides lowering your monthly payments, a 20-percent down payment can help you avoid private mortgage insurance. PMI is a type of insurance that protects lenders in case borrowers default. It can add a monthly premium to your mortgage payments and cost you extra at closing, according to the Consumer Financial Protection Bureau.
Lower Your Debt-to-Income Ratio
Lenders are wary of handing over money to borrowers who are already in over their heads. The CFPB recommends a DTI ratio of 43 percent or less, though the National Foundation for Credit Counseling says 36 percent or less is ideal.
Mortgage lenders want you to have a lower DTI ratio because you’re more liable to fall behind on monthly payments if you’re already juggling other debts. To determine your DTI ratio, add up your monthly debt payments and divide that number by your gross monthly income.
Lower Your Loan-to-Value Ratio
The LTV ratio is your mortgage loan amount divided by the appraised value of the home you’re buying. The lower the LTV, the less risky the loan will seem to the lender, as you’ll have more equity in your new home. Your down payment can help lower the LTV ratio.
Consider an FHA Home Loan
An FHA loan can help you buy a house with bad credit. Provided by the Federal Housing Administration, FHA loans help first-time homebuyers and borrowers with poor credit to secure financing for a home.
Requirements for an FHA loan are less strict than with conventional lenders. For instance, FHA loan borrowers are required to have a minimum FICO score of just 580 to qualify.
The Bottom Line
Buying a home with bad credit can be difficult — but it’s not impossible. Boost yours and your spouse’s credit scores by trimming debt, fixing errors on your credit reports and saving up a big down payment. You can also secure alternative financing to buy a home.
Knowing how to buy a home — and when — is a feat, so be prepared with mortgage questions for potential lenders, so you know their requirements and rates. Be honest with your spouse about your finances and goals, too. The two of you should be open to taking a step back to work on your credit scores and histories before pursuing financing.
Keep Reading: 12 Ways to Make Buying Your First Home More Affordable
Michael Galvis contributed to the reporting for this article.