For many couples, buying a house together is a dream. Things may not go smoothly in reality, though, if you and your partner have a stark difference in credit scores. Getting approved for a large enough mortgage with a relatively low interest rate could be a challenge.
How Different Credit Scores Could Make It Hard to Buy a House
Credit scores are based on several factors, including an individual’s payment history, the number and type of accounts, the percentage of available credit used and the average age of the accounts. The three credit bureaus (Equifax, Experian and TransUnion) each report their own credit scores. A high credit score can help a mortgage applicant qualify for a competitive interest rate.
If you and a co-borrower submit a joint mortgage application, the lender will pull each of your credit reports and look at your median credit score along with your co-borrower’s. The lower of the two scores is the one the lender will use to set your interest rate. If you or your partner has a credit score that is significantly lower than the other, a lender might quote you a much higher interest rate than it would have quoted if only the person with the higher credit score had applied for a mortgage.
How to Buy a House When One Partner has Bad Credit
If one of you has a low credit score that would force you to pay a higher interest rate, you might be able to qualify for a lower rate if the person with better credit applied for a mortgage alone. The lender would only consider that person’s income when deciding how much money to loan you to buy a house. That may or may not prevent you from buying the home you wanted.
If one person took out a mortgage, you could put both of your names on the title so that you would jointly own the house, but only the person whose name was on the mortgage would be held responsible for repaying the loan. That could allow you to buy a home, but things could get messy if your relationship ends.
Consider Delaying a Home Purchase to Address Bad Credit
If you would not be able to get a large enough mortgage with only one person’s income and you would have to apply jointly, you might be able to get a better interest rate if the person with bad credit worked on improving it. Paying bills on time and lowering credit card balances and credit utilization ratios could bump their credit score up enough to qualify for a lower interest rate.
You may have to put off buying a house for several months, or possibly a year or longer. That might be frustrating, but it could save you tens of thousands of dollars in interest over the life of the loan.