Buying a Home Together? Do this First.
Choosing, buying and settling into a shared home is a significant step for any couple. If you and your partner are progressing towards this milestone, it’s important to take some time to consider more than just your aesthetic preferences and favorite neighborhoods. Your credit scores and histories will also play a role in your homebuying journey.
If you want to secure the best possible mortgage and lowest available interest rate, you and your partner must examine your respective financial situations and how they may affect your homebuying process. And because there are steps you can take to correct past mistakes and set yourself up for success, it’s better to start talking about your credit scores and finances early as possible in your shared home search.
Having the credit score conversation
If you’re seeking a home, and a loan to pay for it, one of the most important financial metrics to review and analyze is your credit score. If you’ll be applying for a loan as a couple, with two co-borrowers on the application, you must look at both of your scores. This is because home lenders examine both co-borrowers’ scores. Because they are primarily interested in gauging risk, they’re going to measure your loan worthiness on the partner with the riskier score.
As you probably know, individual credit scores—also called FICO scores—are used by financial and lending institutions to measure risk. Specifically, your score will determine whether an institution decides to give you a loan and at what rate. These scores range from 300 to 850, with anything above 740 considered as excellent credit and deserving of the best available rate from most lenders. Above 680 is considered good credit, and anything in the range of 620 to 680 is deemed acceptable.
To kick things off, we recommend scheduling some time with your partner to sit down and review your respective FICO scores. You’ll be able to use this time to secure your credit reports, go through them together, and decide the best course of action for moving forward.
If your scores are both good or excellent and within 10 to 20 points of each other, you’re in a good position to jointly apply for a home loan as co-borrowers. By doing so, you can leverage the combined income of both parties to qualify for a larger loan (if that’s what you want). However, if you find that one of you has a significantly lower score than the other, you’ll have to have a more in-depth conversation about the best way to proceed.
Raising a credit score over time
Let’s say you and your partner want to jointly apply for your home loan in order to maximize your income level and qualify for a higher home price point than either of you could get on your own. If your partner’s credit score is only in the “acceptable” range, while your score is excellent, you both have work to do over the coming months. It is possible to raise your partner’s score and put you both in the best possible position to get a mortgage as co-borrowers.
First, carefully review your credit reports to ensure everything is accurate and there are no mistakes. If you find an inaccuracy, have it corrected. Then, make a plan to pay off as much of the existing credit card balances under your partner’s name as you can in the coming months. The closer his or her debt stays to the overall limit, the worse off a credit score will be. Also, make a point to be hypervigilant about paying bills exactly on time. Even a minor delay or slightly late payment could knock back that score. And finally, consider adding the lower-scoring partner as an authorized user to a credit card in the name of the higher-scoring partner. Even if the lower-scoring partner doesn’t use the card, it should bring up their credit score just by being authorized to do so.
Choosing single borrower, joint ownership
If you find, during the course of your homebuying and credit score conversation, that one partner’s score is just too low or you want to get a home before having to wait for a score to rise, you may decide it’s worthwhile to just use one name for the home loan application. This may be the best course of action if one partner has a strong income, good or excellent credit score, and low debt-to-income ratio in their own right. If you or your partner can carry the loan application solo and secure a mortgage large enough to buy the home you want, there’s no need to add both names to the loan. This option allows you to circumvent the potential hit you would have taken for presenting a lower FICO score.
And while you may feel reluctant to add just one person’s name to the loan application—after all, this will be your home together, as a couple—you can rest easy. It is still possible to add both parties’ names to the home title, which lays out the official ownership structure. This means that you will both officially be homeowners, and can still relish achieving that milestone together. It’s just for the purposes of the mortgage and securing the best available rate that you’ve made a strategic choice to use present one borrower.
As you can see, there are options available to you and your partner that will make the homebuying process as strategic and cost-effective as possible. And though this financial analysis may seem daunting at first, you’ll feel relieved and confident once you’ve completed this important first step. Then you’ll be ready to move on, as a couple, to the more exciting and romantic aspects of owning your first shared home.
Learn more about buying a home with your significant other and download our free guide at loans.lendinghome.com/buying-together/.