Buying A House When One Spouse Has Bad Credit

Many families strive towards homeownership. These families want more control over their living arrangements and want to feel like part of a community. However, home prices leave many families priced out of homeownership. Bad credit can make buying a home cumbersome, but it is possible to buy a home even if one spouse has bad credit. 

Let’s take a closer look at home purchasing for couples, how should you apply, and 7 ways to increase your spouse’s credit.

Can I buy a house when my spouse has bad credit?

Buying a house when one spouse has bad credit complicates the process, but it’s still possible to buy a home. The way you apply for a mortgage determines how bad credit will affect your application, and certain mortgages account for low credit scores.

Joint vs. single applicant: decide how to apply

When applying for a mortgage, you can either apply jointly or through a single applicant. Lenders do not care how you apply. They focus on the credit score(s) and the applicant’s debt-to-income ratio (s).

Lenders will not consider a spouse’s bad credit score if the other spouse submits a single application. The lender will only review the single applicant rather than also considering the spouse with bad credit. The more significant the gap between your credit scores, the more sense it makes to file as a single applicant.

While this application strategy makes lenders look the other way on a spouse’s bad credit, they also don’t consider their income. Applying as a single applicant lowers the income you show. If you and your partner both work, filing jointly will show the lender a higher income total which can help with the debt-to-income ratio. Both of these factors increase how much a lender is willing to lend.

Although these general rules act as a reliable reference, nuances within each state can provide additional perks or disadvantages for each decision. Review the laws in your state before deciding whether to apply jointly or as a single applicant.

Mortgage options if your spouse has bad credit

Buying a house when one spouse has bad credit is still possible with the right mortgage. Some mortgage options cater to couples with low credit scores to make homeownership more accessible. It is possible to buy a house with bad credit. Review these mortgage options when planning your purchase.

Larger down payment

When banks lend homeowners money, they remain on the hook if the homeowners default on the loan. Larger down payment will reduce the lender’s risk, causing them to weigh a bad credit score less heavily and provide lower interest rates.

Increasing your down payment will also make your monthly mortgage payments more affordable. Accumulating enough money for a down payment is challenging enough. Opting for a more affordable home or storing up additional funds can help pay down a more significant percentage of the property from the start.

FHA loans

FHA loans appeal to first-time homebuyers for their 3.5% down payment requirement. These loans cater to home buyers with low credit scores and speed up the path to homeownership. Since the down payment falls below 20%, you will pay private mortgage insurance each month. You can eventually get out of private mortgage insurance premiums by reaching 20% equity in your home or refinancing in the future.

You can get started with an FHA loan with a credit score as low as 500. A higher credit score reduces the minimum down payment required, but homebuyers can exceed the minimum down payment to lower the loan’s interest rate and monthly mortgage payments.

Fannie Mae HomeReady Loan

Fannie Mae HomeReady Loans help meet the financial needs of homebuyers with low credit. You can get one of these loans for a down payment as low as 3%. You can input additional income streams such as rental property income that wouldn’t count towards other loans when applying for a loan.

Fannie Mae HomeReady Loans allow you to add a co-borrower. You can include a parent as a loan co-borrower even if that parent doesn’t live in the home. This arrangement boosts your income on paper, improving your chances of getting approved for the loan.  

7 home buying considerations when one spouse has bad credit 

Buying a house when one spouse has bad credit requires considerations. It’s important to review different options, so you prime yourself for a successful home purchase.

1. Improve your spouse’s poor credit before applying

The best-case scenario is both spouses filing jointly with high credit scores. Purchasing a home takes considerable time. You must review numerous homes, negotiate with the owner, and work on the necessary paperwork.

During the search, your spouse can improve their credit score by building up their payment history. MoneyLion’s Credit Builder Loan will help your spouse improve their credit score. Paying back the Credit Builder Loan will boost your spouse’s credit score. Taking this step at least 12 months before purchasing a home can strengthen your joint application for a mortgage.

2. Compare mortgage rates

While homeownership is exciting, don’t rush towards it. Take your time and review mortgage rates to make sure you select the best deal. If you lunge towards the first mortgage you can get, you might miss out on a better deal. Reach out to multiple banks regarding their mortgage offers to find the best one for you.

3. Down payment assistance

Some home buyers qualify for down payment assistance through state and local programs. Some programs provide grants to potential home buyers to stimulate homeownership. 

Down payment assistance is geared towards low and moderate-income residents. Most assistance programs will require you to take a homebuyer education course, contribute some of your money towards the purchase, and stay below the maximum home purchase price. An area’s median home purchase price usually dictates the maximum home purchase price.

4. Add them as an authorized user

Adding your spouse as an authorized user will build your spouse’s credit as you build up your score. Credit scores weigh authorized user activity less than activity on their account, but it will impact your spouse’s credit score.

However, thoroughly vet the person who is allowing your spouse to add them as an authorized user. Although your spouse is the one looking for help, you want to make sure you trust this person, they have great credit, pay their bills on time and they have a consistent stream of income. Any bad money moves or late payments on the credit card your spouse is authorized on could end up hurting your spouse’s credit score. 

Any slight increase to your spouse’s credit score can make a big difference in securing better deals and higher loan amounts. Rising from a 600 credit score to a 640 credit score is the difference between a bad credit score and a fair credit score. Adding them as an authorized user to your credit card will help.

Before pursuing this option, ask the credit card issuer if they report authorized-user activity to the credit bureaus. 

5. Work on lowering their credit utilization ratio

Each credit card has a maximum borrowing limit. Your credit utilization ratio measures how close you get to that limit. If your maximum borrowing limit is $3,000, and your credit card debt resides at $1,000, you currently have a 33% credit utilization ratio.

A high credit utilization ratio makes lenders wary of lending you money. A high ratio demonstrates an inability to pay off debts quickly. Higher deficits also hurt your debt-to-income ratio, another metric lenders use when deciding on your loan amount. 

Generally speaking, a credit utilization ratio under 30% is considered good. A lower ratio will help you stand out amongst other applicants. You can lower your credit utilization ratio by reducing your expenses and paying down the debt. RoarMoney helps with this goal by tracking your spending. When you track your spending, it’s easier to cut down on expenses and allocate more funds towards debt.

RoarMoney provides additional features to give members a financial edge, such as early payments and zero hidden fees– at only $1/month. 

6. Pay off any delinquencies or debt

Lenders will heavily weigh your debt-to-income ratio when deciding how much to lend. Paying down any delinquencies or debt will enhance your debt-to-income ratio, which will give you access to better loan terms. Chipping away at debts little by little can snowball and create strong momentum. 

Prioritizing debt paydown will also help when you get the loan. For many homeowners, the loan is their highest debt. Eliminating your other debts will reduce your financial stress and allow you to prioritize the mortgage instead of letting smaller debts constantly get in the way. Even if you don’t plan to buy a home right away, pay down delinquencies and debts now, so you are ready when the time comes.  

7. Pay bills on time

Paying bills late will hurt your payment history, a vital component of your credit score. Paying bills on time will indicate to lenders that you can handle debt. You can bolster your payment history through a MoneyLion Credit Builder Loan. The loan helps anyone build their credit score, and MoneyLion allows members to enable autopay so you’ll never forget any issued payments. We’ll report your payment activity to all three credit bureaus, ensuring your credit score rises in the process.

Opening the door to multiple possibilities

Homeownership is a common goal. While searching for your next home, work on your credit scores and review various mortgage deals. Always keep an open mind when browsing homes and financing options.

If your priority is building up your credit score (or your spouse’s), a MoneyLion Credit Builder Loan can help. The loan will strengthen your payment history, putting you and your spouse in a position to land better deals. What you do over the next few months can make a big difference in the monthly mortgage payments and the house you select.   

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