Marriage is considered by many to be the ultimate partnership between two people. Couples not only combine their homes, belongings, and lives, but often combine their finances as well. They set goals, make plans, and commit to working together to make their dreams a reality.
Most couples I know either dream of buying a house or have already made that achievement a reality. In my husband’s and my case, we couldn’t wait to buy a house, and when I graduated college we immediately started house hunting – but not before heading to the bank to become pre-approved for a mortgage.
What we found when we tried to obtain that mortgage preapproval was that my husband’s identity had been compromised since the last time we had checked his credit. Not only did we have a huge credit mess and a tanked credit score to clean up, we had a deadline to buy a house – because we were having a baby!
Ultimately, we decided to leave my husband off of the mortgage, and that I would buy the house on my own while we sorted out his identity theft situation, but there are many other scenarios in which you may want to apply for a mortgage without your spouse.
Credit problems can arise for many reasons:
- Identity Theft (like ours)
- Lack of Credit
- Low Credit Score
- Excessive Debt
Identity theft is the biggest shocker of all, as you may not know that your identity was compromised until you attempt to qualify for a mortgage. It can result in excessive debt, a ruined credit score, or high credit usage. In order to avoid a surprise like ours, it is good idea to check your credit on a regular basis, and especially before trying to obtain pre-approval for a mortgage.
Unfortunately, mortgage companies don’t just pick and choose the best credit aspects from both spouses; or even use the average of their credit. What a bank will be most concerned with is the lowest credit score, basically calling attention to the very credit problems you wanted to hide.
Lack of credit can be just as damaging to your mortgage application as bad credit is. If your spouse does not have a credit score at all, or has a very short credit history, it may be better to leave him or her off of the mortgage application so that you can secure a better rate.
The same goes for high credit usage or a high debt-to-income ratio. High credit usage is considered using 20% or more of your available credit, such as using 20% or more of your credit card limits. A high debt-to-income ratio is when your debt payments are more than 40% – 50% of your income.
Banks have maximum requirements for credit usage and debt-to-income ratios in order to approve a mortgage application, and if one spouse does not meet the maximum criteria, you could end up paying a higher interest rate, or even be denied a mortgage.
So, if your spouse has credit problems, you might want to consider leaving your spouse off the mortgage application – unless you need his or her income to qualify.
Generally to apply for a mortgage, you will need the following:
- 2 Years of W2’s
- 2 Years of Tax Returns
- 2 months of bank statements
Some situations call for more documentation or less, but you should have these documents ready, at the very least.
Occasionally, one spouse will not meet these requirements. He or she may not have had a job for the last 2 years, or may be self-employed and not have 2 years of self-employment tax returns. If your spouse does not have consistent income, or cannot provide this documentation, it may make more financial sense to leave him or her off the mortgage application.
The Application Process
Even though only one spouse is applying for your mortgage, it is important to note that there will be some differences in the application process and being prepared for them will make the whole process go much faster.
- A Smaller Loan Amount: Cutting your combined incomes in half also lessens the mortgage amount that you will quality for.
- The Mortgage Company Will Look at Your Spouse’s Debt: If the home you are looking to purchase is in a community property state, or is a FHA or VA loan, both spouse’s debts will be taken into consideration.
- Joint Bank Accounts Are Ok: As long as you are listed as an owner on the account – no matter the other account owners – the bank should have no problem with your home loan.
- You Spouse Will Need to Acknowledge The Debt You’re Taking On: Even though only one spouse is taking out the mortgage, many lenders will require that the other spouse sign an acknowledgment form stating that they understand the debt that their spouse is taking on.
Besides the above differences, buying a house without your spouse is not really all that different than buying a house with them. It may actually be easier, as only one person needs to rearrange their schedule to sign important documents related to the mortgage and closing, rather than two.
Ultimately, It Is The Rate That Matters
The goal in applying for a mortgage is to get the best rate possible. And the way to get your best rate possible is to present the most credit-worthy, solid mortgage application possible to the bank. Sometimes, this means leaving one spouse off of the application, and proceeding alone.
The more attractive you look as a borrower, the lower your mortgage rate. Doing something as simple as leaving one spouse off of the mortgage, could lower your rate enough to save you hundreds of thousands of dollars.
Consider this example: A 6% rate on a $200,000, 30-year mortgage (assuming a 20% down payment) will cost you $185,340 in interest over the course of the loan.
That same mortgage with a 5% rate will cost you $149,207 in interest over the course of the loan – saving you $36,133 just by dropping your rate by 1%!
Even though it may seem unconventional at first, buying a house without your spouse actually makes quite a bit of sense in some situations. As with any big decision, be sure that you make the decision about whether to buy a home together or separately by talking openly so that you and your spouse are on the same page about your homeownership dream and what it will take to get there.