Ask an Expert: Spouse with poor credit

A: If you are planning to buy a home with a spouse who has poor credit, you have several options when you apply for a mortgage.

First, you can purchase the house on your own and apply for the mortgage without your spouse. Your good credit rating will likely help you get a more favorable mortgage interest rate than if you applied jointly. The downside is that you may qualify for a smaller mortgage, since the lender will consider only your income and ability to meet the payments. If your spouse is the main breadwinner in the family, you may find that you cannot afford the home you intend to buy.

A second option is to become joint owners of the home and include both names on the application. As you anticipate, your spouse’s low credit score may result in your having to pay a higher interest rate than if you had applied on your own. The advantage, however, is that the lender will consider both spouses’ earnings when assessing your debt-to-income ratio, so you may be able to borrow more.

If you have saved enough for a large down payment (25 to 30 percent), you might also consider a stated-income mortgage with you as the sole borrower. With this type of loan, you must be able to document the nature of your employment, but the lender will not require you to document your income, so you may be able to qualify for a larger loan than would otherwise be possible. Stated-income mortgages have slightly higher rates than traditional mortgages, but the rate may be lower than what you would have obtained with your spouse’s poor credit. Remember, however, that you would be fully responsible for this loan, since your spouse would not be a co-borrower.

Finally, if you have parents with good credit who are willing to co-sign your mortgage, that may also help you secure a lower rate. This arrangement isn’t something to enter into lightly, however, as your parents would share the consequences if you are unable to meet the loan’s obligations.

Looking ahead, work with your spouse to improve his or her credit rating. If they pay their bills on time and pay down the amount they owe, over time their credit will improve. In a few years you can refinance your mortgage, and with both of you as borrowers with good credit, you should be able to secure a good interest rate.

Dan Moore, VP of product management

Get Home Mortgage Loan offers customized for you today.