Most of us need to apply for financing when we purchase homes. Unless you’re one of the fortunate few who can buy a house with what’s in your bank account today, you will, too. Some people, including married couples, are better off applying for financing in just one name.
In some cases, it’s a clear-cut decision. One partner has lower-than-average or bad credit, while the other has a great score and enough income to satisfy the lender.
Other times, though, it’s not so cut-and-dry.
Should Couples Apply for Home Financing Together?
When you’re trying to determine who should apply for home financing, you need to know that lenders generally consider:
- The lowest “middle” credit score between you. Let’s say the three credit bureaus report an 800, an 810 and an 820 for you; they report a 650, a 660 and a 670 for your partner. The lender is going to use the lower of the two “middle” credit scores, which is 660, when they determine whether you qualify.
- Your combined debt-to-income ratio. While it often makes sense to use your partner’s income to lower your own debt-to-income ratio, remember that lenders will also consider his or her debts. Even though your partner may contribute quite a bit to the total income you’re reporting to the lender, if he or she has a high debt-to-income ratio, you might be better off flying solo.
Other things that you need to consider include the interest rates lenders are willing to give you and whether you and your spouse will have equal rights to the property under Tennessee law.
What Lenders Want to See
When lenders evaluate your creditworthiness, what they’re really looking for is an answer to their biggest question: Will this person repay the loan?
Generally, your monthly mortgage payment (including the principal, interest, taxes and insurance) shouldn’t be higher than 28 percent of your gross monthly income. The easiest way to figure out your housing expense ratio is to multiply your monthly salary by 0.28. You can also multiply your annual salary by 0.28 and divide it by 12 to figure out how high your payments can be if you’re approved for a mortgage.
For some people, the best choice is a joint mortgage application. Because everyone’s situation is unique, it’s important that you take a good, hard look at your financial situation and be honest with yourselves about applying for a home loan.
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