Can You Combine Credit Scores to Buy a House?
Understand how lenders assess credit for joint mortgages. Learn the true impact of your credit scores and other factors on home loan eligibility and terms.
When applying for a mortgage with another individual, lenders evaluate each applicant’s credit score individually to determine eligibility and loan terms. This differs from simply combining or averaging scores. This review helps lenders understand the collective financial responsibility and risk associated with the loan.
Understanding Joint Mortgage Applications
When multiple individuals apply for a mortgage, lenders assess each applicant’s credit profile individually. The most common practice identifies the “lowest middle score” among all primary borrowers for underwriting. Lenders obtain credit scores from the three major credit bureaus (Equifax, Experian, and TransUnion) for each applicant. For each person, they take the middle of their three scores. From those middle scores, the lowest one determines the mortgage terms.
A primary borrower is the individual primarily responsible for repaying the loan, and their income often qualifies for it. Lenders use this approach to evaluate the overall loan risk. If one applicant has a significantly lower credit score, it can negatively influence loan eligibility or terms, even if other applicants have strong credit.
Credit Score Impact on Mortgage Eligibility and Terms
Credit scores, particularly the lowest qualifying score, directly influence mortgage eligibility and terms. A higher score signifies lower risk to lenders, increasing the likelihood of loan approval. For conventional loans, a score of 620 or higher is generally needed, though some lenders approve loans with scores as low as 500 for government-backed options like FHA loans.
Credit scores also affect the interest rate. A higher score, often 740 or above, typically qualifies applicants for the most favorable rates. Even a modest increase in credit score, such as 20 to 30 points, can lead to lower monthly payments and substantial savings over the mortgage’s lifespan. Conversely, a lower credit score results in higher interest rates, increasing the total loan cost. Higher scores can also lead to more attractive loan terms and potentially a larger loan amount.
Factors Beyond Credit Scores in Joint Applications
Lenders consider a broader financial picture for joint mortgage applications. The combined income of all applicants is a significant factor, determining repayment capacity. Lenders require stable employment history, typically two years of consistent work in the same field. W-2 forms, pay stubs, or tax returns verify income and employment.
The debt-to-income (DTI) ratio compares total monthly debt payments to gross monthly income. Lenders prefer a DTI ratio of 36% or below, though some approve loans with ratios up to 45% or 50% for FHA loans, especially with compensating factors like cash reserves. This ratio provides insight into how much of the combined income is allocated to existing debts, influencing the ability to manage new mortgage payments.
Assets also play a role in the lending decision, demonstrating financial stability and the ability to cover upfront costs and potential financial setbacks. Lenders consider funds in checking and savings accounts, money market accounts, and investment or retirement accounts like 401(k)s. Applicants provide statements, often covering at least two months, to verify these assets. These elements collectively contribute to the lender’s holistic assessment of financial readiness.
Strategies for Improving Credit Before a Joint Application
Individuals can strengthen their credit profiles before a joint mortgage application. A foundational step involves obtaining and reviewing credit reports from Equifax, Experian, and TransUnion to identify and dispute errors. Common errors include incorrect personal information, accounts that do not belong to the individual, or inaccurately reported late payments. Correcting these discrepancies can positively impact credit scores.
Paying down existing debts, particularly high-interest credit card balances, is another effective strategy. Lenders assess credit utilization, the percentage of available credit used. Aim for a credit utilization ratio below 30%, with under 10% considered ideal for demonstrating responsible credit management. Reducing outstanding balances lowers this ratio, which can lead to an improved score.
Consistently making all payments on time is important, as payment history is a significant factor. Setting up automatic payments can help ensure timeliness. Avoiding new credit inquiries, such as applying for new credit cards or loans, is advisable in the months leading up to a mortgage application, as each inquiry can temporarily lower credit scores. Maintaining older credit accounts, even if infrequently used, also contributes positively to credit history length.