If you and your partner plan to split the mortgage payment, and if both names will appear on the mortgage deed, it only makes sense for both of your names to appear on the mortgage loan.
Although it’s customary for couples — either married or living together — to apply for a mortgage loan together, they may run into a few obstacles along the road to homeownership. For that matter, here are three things to know when applying for a home loan as a couple.
1. Understand the way lenders handle different credit scores
If you’re applying for a mortgage loan as a couple, the mortgage lender will check both of your credit reports and credit scores. The bank reviews your debt, the length of your credit history and current credit activity.
Paying bills late and too much debt can negatively impact a mortgage approval, plus influence the mortgage rate. However, some couples believe that they’ll receive a low interest rate as long as one person has excellent credit — but this isn’t always the case.
In many cases, mortgage lenders use the lowest credit score to determine the mortgage rate. Therefore, if you have a 790 credit score and your partner has a 670 credit score, you’re not likely to receive the most favorable rate due to your partner’s less-than-perfect credit history.
To ensure the best rate, both of you need to maintain good credit before applying for a loan. This includes paying bills on time, paying off debt and checking your credit reports for errors.
2. Lenders might not use both incomes when determining affordability
Some couples apply for a mortgage loan together to qualify for a larger amount. Since lenders use their combined incomes to determine affordability, putting both names on the mortgage loan might be the difference between a $100,000 house and a $200,000 house. However, there are times when a mortgage lender will not accept both incomes.
On average, mortgage lenders require 24 months of consecutive employment and income. Therefore, if your partner didn’t work for the past two years, and recently found a job within months of applying for the mortgage, the lender may not use his or her income. In addition, if your partner is self-employed and doesn’t have tax returns for the past two years, the lender may not use his or her income.
In each case, lender will base the approval amount on one person’s income, which reduces purchasing power.
3. You can’t easily remove a name from the mortgage loan
Unfortunately, some couples eventually go their separate ways. If you apply for a mortgage loan as a couple, and one person decides to keep the house after a break up or divorce, refinancing is the only way to remove a name from the mortgage.
The remaining spouse will have to refinance the mortgage in his or her name only. However, since the original mortgage approval was based on both incomes, the remaining spouse may not be able to qualify for the mortgage loan on his own, at which time, you’ll have to sell the home and use proceeds to pay off the remaining mortgage debt.
Applying for a mortgage loan as a couple can increase purchasing power. However, to receive the lowest mortgage rate and enjoy a hassle-free approval process, both parties need to keep a close eye on their credit and maintain accurate income records.
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