When Spouses Have Different Credit Scores

When two people marry, their credit histories are rarely taken into account, and rightly so.  Marriage isn’t about the financial responsibility of the individuals involved.  But when married couples wish to purchase a house and need to take out mortgage, different credit histories can become a problem.  Specifically, when one partner has a good credit history and the other poor credit, the process of purchasing a house can be confusing.  The couple has several options, and deciding on an option depends essentially on how expensive the intended house is.

One option would be to convince a third party to act as the co-borrower in place of the spouse with bad credit.  The third party would have to have better credit than the spouse and preferably a steady income to show as an ability to make payments.  However, the only individual that could take the role as the co-borrower would probably be a parent.  Another option would be to have the spouse with good credit be the sole borrower on the mortgage, but the downside is that it would only take into account the income of the spouse with good credit, thus limiting the amount of the loan.

To get around this, the spouse with good credit could get a mortgage that doesn’t require income verification, so the mortgage would be calculated without taking income into account.  However, with loans of this type a large down payment is usually required, so be sure you could handle that sort of financial burden all at once when picking this option.

Perhaps the worst option would be for the couple to take out the loan together as co-owners and co-borrowers.  This would result in a loan that is affected by the bad credit of one of the spouses, meaning a high interest rate.  It is possible for one spouse to be a co-owner of the house and not a co-borrower.  Make sure you examine all possibilities and determine which is right for your current financial situation.

Float Down Mortgages

Loans with attractive features are usually more appealing to borrowers than standard, by-the-books loans with fixed rates.  One feature that is being found in a growing number of mortgage loans is the “float-down.”  With a float-down loan, the borrower reaps the benefits of a lock on the loan, that is, the interest rate will not increase if the market rate increases.  Furthermore, the float-down loan’s key component is an option to reduce the interest rate if market rates decline.

This may sound too good to be true: a loan that will not increase if the market increases, but will decrease if the market deceases.  Since this type of loan has added value to the borrower, the lender must recoup that benefit in the form of a higher price.  This higher price is usually paid by the borrower in terms of additional “points,” or percentages of the total loan amount (1 point on a $100,000 loan is $1,000).  That being said, a regular fixed rate loan might ask a borrower to pay 1.5 points, but that same loan with a float-down option could require 3 or more points.  In general, the points will still be higher on a float-down than on a fixed rate loan with a lock for a certain period of time, in order to take advantage of potentially falling market prices.

Stated Income Loans

People who wish to purchase a house do so at different points in their lives and careers, sometimes when the amount of income is less than desired.  Self-employed individuals or those who have trouble documenting their income will often choose to get a “stated income loan.”  With this type of loan, the application asks the borrower to state their income, and the borrower is then qualified based on that amount of income.

It might be tempting to overstate one’s income on a stated income loan, in order to qualify for a larger loan, but there is considerable risk in doing so.  For one, if the borrower is found to have intentionally mislead the lender, the loan could be called in full (usually resulting in sale of the house), or the borrower could be prosecuted.  Most lenders perform fact-checking on 10% of the loans they process, and they also may require IRS tax returns.  If the stated income on your loan does not match up with the amount on your IRS return, or there are other discrepancies, your rouse will have been discovered, and you will be in big trouble.

If brokers advise you to use a false income amount on a stated income loan, be very cautious.  Sure, you might not be caught, and you might qualify for a larger loan, but the broker is not the one at risk by suggesting this advice: if you are found to have lied on your loan application, expect to find yourself in a very difficult situation, financial and otherwise.