My Spouse Has Bad Credit! Can We Get a Mortgage?

By Gina Pogol
Mortgage Credit Problems Columnist

Dan Asks: Dear Gina, My wife and I would like to buy a new home but her credit is pretty bad. Mine is really good. Do we have to get a bad credit mortgage?

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Gina Says:

Hi Dan,

It doesn't seem fair, but lenders typically pull credit scores from the three big bureaus, TransUnion, Equifax, and Experien, take the middle score for each borrower, and use the lowest of the two scores to determine if you get approved and what mortgage interest rate you pay. You can have an 800 credit score, but if your wife has a 600, you get saddled with 600 also.

There are a couple of ways around this. First, the easy way.

If your income alone is high enough to qualify you for a mortgage, just leave your wife off the loan. While many spouses don't like this, and there may be hurt feelings, remind her that she can be put on title to the property immediately after the mortgage funds. This gives her all the property rights she'd have if she'd been on the mortgage application. And if her credit is okay when it's time to refinance, she can be a borrower on that mortgage--this may give her some incentive to clean up her credit.

If your debt-to-income (DTI) ratios are high, use a different strategy.

Some mortgage programs. like FHA, allow you to finance with higher ratios if you can show that there is more income to make the payments even if you can't "officially" count it. In addition, your two-income household probably allows you to spend more on housing than your "official" income would indicate. If you can demonstrate that you've been successfully managing higher payments than you'd be expected to on paper, you can be approved with a higher DTI ratio--45% is not uncommon, and with a larger down payment (10% or more), you may be able to go as high as 50%.

You may also be able to lower the debt considered in your application. If you don't live in a community property state, try transferring obligations from your credit cards to your wife's. They won't be counted in your DTI. If you're in a community property state, however, they will be, because you have contingent liability--if she doesn't pay, you do.

You may be able to increase your income by having your spouse pay you rent (but it has to go on your tax return). FHA's credit underwriting guidelines state:

Rental income from boarders is acceptable if the boarders are related by blood, marriage, or law. The rental income may be considered effective income if shown on the borrower's tax returns. Otherwise, the income only may be considered a compensating factor and must be documented adequately by the lender.

If you go that route, get a tax guy (or gal) to help you with rental write offs like depreciation (which is added back into your income for underwriting purposes). That way you can increase your paper income without getting clonked at tax time.

If you absolutely need your spouse's income to qualify, you have to improve her credit.

In the past, the partner with the good credit could have gotten a low-doc loan and claimed all the income he or she had access to for mortgage payments. But those loans are gone, at least for now. So, you can go ahead and call a bad credit mortgage lender and get a loan to buy your home. There are some great deals on houses, and this may be a smart option. Try to stay away from bad credit mortgages with long prepayment penalties, because you want to refinance as soon as your wife improves her credit.

Your other option is to hold off buying until her credit is good enough to get a new home loan. You can help with that by adding her as an authorized user to your good credit accounts (she doesn't have to actually use the credit or be given a credit card), which can improve her credit score. Get her on an automatic or electronic bill paying system, or even take care of the finances yourself (it can save you both money). Pay her debts down and have her stop using credit, perhaps switching to a debit card for convenience.

Thanks for writing and good luck.


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