Should both your names be on the mortgage?

You've got a solid relationship and you're ready to take it to the next step—applying for a joint mortgage. In an ideal world, you want both of your names on the mortgage. This shows commitment to the relationship, but it also helps each of you build a good credit history if you make responsible payments on the mortgage.

But before you leap into a joint mortgage, take some time to review your credit histories, credit scores, and debt-to-income (DTI) ratios. If this sounds daunting, don’t worry. We’ll go through this step by step.

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First, check your credit reports

When couples marry, they combine households as well as their finances, such as their paychecks. But when it comes to credit, their credit histories do not merge. So each spouse retains the same individual credit report that they had before the marriage.

You can get your free annual credit reports from the three credit bureaus at AnnualCreditReport.com. Review the reports and confirm that everything is accurate. Errors can bring down your credit score, so this step is important.

What’s your score?

You won’t be able to determine the exact score that the lender will use because when the bureaus calculate a requested credit score, they might use a different version of a FICO score (there are many versions of FICO scores). So this isn’t an exact science, but just getting an idea of the range your score falls into is all you need at this point.

So how do you do that? Many credit card issuers are now giving free scores (some are FICO scores; some are not) with your monthly statements. So check that out. There are also sites where you can get free educational scores, such as Credit Karma. Discover is also offering a free credit score service to both customers and non-customers.

What’s your combined debt-to-income ratio?

Another factor that will be considered when you apply for a mortgage is your DTI ratio. A mortgage lender will combine your incomes and then compare that to the total amount of debt you have.

Here’s a simple example: Let’s say you and your spouse’s combined income is $200,000 and your combined debt and expenses come to $45,000.

The debt-to-income ratio = .225, or 22.5% (25,000 / 200,000).

Now, a mortgage lender will have a more complex way of calculating your DTI ratio. There’s also what’s called a front-end ratio and a back-end ratio. But just calculating some basic information gives you an idea of where you stand.

In the example, 22.5% is an excellent ratio. Why is this so important? According to the Consumer Financial Protection Bureau, in general, 43% is the highest DTI ratio that a borrower can have and still get approved. There are exceptions, but it depends on the size of the lender and on the lender's ability to show that the borrower can make the mortgage payments.

There are also calculators online to give you a helping hand with the math, such as this one on Zillow.

Which credit score is used with a joint mortgage application?

Okay, let’s say your DTI ratio passes muster and you and your partner decide that you want both of your names on the mortgage. For a joint mortgage, a lender will request credit scores (usually a version of a FICO score that’s specific to mortgage risk) from each of the three major bureaus: Equifax, TransUnion, and Experian.

The lender will look at your three credit scores and your spouse’s three scores. Yes, that’s a total of six scores that the lender has requested.

Now, the question is which score is used to determine if the applicants qualify for a mortgage (and at what rate). I wish I could say that lenders take the highest score, but that’s not how it works.

This is a little tricky, so I’ll break it down into edible chunks with an example.

Let’s say these are your three credit scores from Equifax, TransUnion, and Experian: 730, 740, and 710, respectively. Middle score: 730.

And let’s decide these are your spouse’s scores from the bureaus: 660, 620, 640, respectively. Middle score: 640.

The lender will choose the middle score for each applicant. Okay, so your middle score is 730 and your spouse’s is 640. Your score is pretty darn good, but alas, the lender will use the lower of the middle scores.

So, unfortunately, if you move forward with a joint mortgage, the lender will use your spouse's 640 credit score. This score will limit not only your ability to get a conventional mortgage, but also the ability to qualify for a good rate. Your best bet would probably be an FHA loan.

How a low credit score costs you money

So you’re at the point where you need to make a decision about whose name is on the mortgage application. Let’s take a quick peek at how a low credit score costs you loads of money over time.

According to myFICO.com, on a $216,000 30-year fixed-rate mortgage, your spouse's 640 score results in a 4.56% interest rate, which amounts to a monthly payment of $1,102.

Your 730 score results in a 3.74% rate and a monthly payment of $999. That’s a $103 a month savings. You might think that really isn’t all that much.

But consider this: Over the life of the loan — 30 years — you end up paying an extra $36,000. Wow, right? That could sure come in handy when the kids want to go to college.

Can a spouse with a high credit score apply alone?

Yes, but there are a few things to think about. If you go it alone, the DTI ratio will now be calculated using only your income. If using only one income is insufficient to get approved, then you might have to wait until your spouse has a higher credit score and apply in the future. Once your partner has a higher score, your chances for approval — and a better mortgage rate — will be much improved.

But if your DTI ratio on your own is good, then the lender will look only at your credit reports and credit scores. Your middle score, 730, which we determined above, is the score that will be used by the mortgage lender.

Now, it’s possible to have your spouse on the title, but not on the mortgage. In this scenario, your spouse has property rights, but no financial responsibility for paying the mortgage. But this creates some legal issues regarding ownership should one of you survive the other, so be sure you consult with an attorney and iron out the details in a legal document.

Adding a co-borrower later on

You can go ahead with the mortgage on your own, and then add your partner later on when they have rebuilt their credit. But it’s not as easy as calling your bank when you want to add an authorized user to your credit card account.

There are detailed rules for doing this and you may have to refinance the mortgage to add a co-borrower. Also, keep in mind that there are costs associated with refinancing and your spouse’s current credit scores and credit reports will be under scrutiny. If in doubt during this process, consult with a real estate attorney.

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