Whose FICO Score do Lenders Use on a Joint Refinance?

Whose FICO Score do Lenders Use on a Joint Refinance?

When you marry your spouse, you marry his credit. Good or bad, you pay the price. Even if you have picture perfect credit, your spouse’s credit can make a joint refinance a nightmare. It is not uncommon to see one partner with a high credit score and another with a low credit score. It is also not uncommon to see partners like this get turned down for a mortgage. So what do you do? Here are the facts when it comes to the FICO scores of you and your spouse.

The Lowest Middle Score in a Joint Refinance

Generally, lenders take the lowest middle credit score between two applicants. This means they pull a tri-merged credit report for each of you. This includes scores from Experian, Trans Union, and Equifax. If you were to apply for the loan on your own, the middle score would be the qualifying score for any loan programs. When you apply for a mortgage with your spouse, the lender compares your middle score to your spouse’s score. Whoever has the lowest score wins, so to speak. Although, it might be considered losing because it could change your loan program quite a bit.

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Avoiding One Partner’s Credit Score

What if you know your partner has horrible credit? Can you omit his credit score from the loan? In a perfect world, you could omit it. Unfortunately, that also means excluding his income. If you want to use your partner’s income to qualify for the loan, you have to use his credit. This requires you to do a little homework. Try to figure out if you could qualify for the loan with your income alone. Do you make enough to cover just your debts, plus the mortgage? By enough, we mean, enough to make your debt ratio low enough for the program. A good rule of thumb to use is 43%. This is the maximum allowed debt ratio under the Qualified Mortgage Guidelines. This means 43% of your income can be used to cover your non-mortgage debts as well as your mortgage. If you can meet this requirement, it is worth applying without your spouse. If not, you have to grin and bear it and use his score.

Credit History

In addition to the credit score, a lender will look at your credit history. Even if you and your spouse squeeze by on the score, there could still be things that hold back your approval. They include:

  • Bankruptcies or foreclosures – Many loan programs require a specific waiting period between the date of your BK or foreclosure before you can apply for a mortgage. Even if you have the credit scores to qualify for the program, you may still have to wait if your spouse claimed bankruptcy before he knew you.
  • Collections – Every lender has different requirements regarding collections. Oftentimes, however, they must be paid before you can close on the loan. If your spouse has excessive collections, you may need to keep that in mind. A portion of your funds may go towards those collections even if you had nothing to do with them.
  • Judgments – Many loan programs don’t allow anyone to qualify if they have a judgment. If you are not sure about your spouse’s credit history, get a copy of his credit report to find out if there are any judgments. You may want to take care of them before you apply for a loan if they exist.

Making the Most of Your Assets

If you end up having to omit your spouse from the loan because of his credit score, there is still a way to use his income without a joint refinance. You won’t be able to use it to bring down your debt ratio; however, you can use his assets. Before you apply for the loan, take the steps to pool your assets together. If both names are on the account, you should be able to use them for qualifying purposes. You need to take this step at least a few months before you apply for the loan, though. Generally, lenders want to see the last 2 months’ of bank statements. If you transfer the funds over within that time, you open yourself up to even more scrutiny.

Cleaning up Bad Credit

In a worst-case scenario, you could start cleaning up your spouse’s bad credit to secure an approval. Unless he has a 300 credit score, which is extremely rare, there are simple ways to help it out. Try a few of the following:

  • Pay down any high balances – This helps to lower his utilization rate. The higher his utilization rate, the lower the score. It may take a few months to see an impact, but every little bit helps.
  • Pay bills on time – If he has late payments reporting on his credit report, work hard to get those accounts current. Timeliness is a major factor in a credit score.
  • Don’t apply for new credit – Avoid any new inquiries on your spouse’s credit report as well as any new trade lines. New credit often brings the credit score down, even if temporarily.

It could take quite a while to clean up your spouse’s bad credit. If you know you need his income to qualify for the loan, the sooner you start, the better.

Lenders choose to use the lowest middle score between two partners because they look at it as an average of everything. Lenders know that the high and low credit scores a person has could be misconstrued. By choosing the middle score, they feel as if they get the best of both worlds.

The good news is you can find out your spouse’s score before you apply for a mortgage. This helps you prepare if you find out he has bad credit. Rather than getting turned down by a lender or being faced with exceptionally high interest rates, you can fix the situation or determine how to apply for the loan on your own. There are definitely ways around a bad credit score in a joint refinance; you just have to be creative!

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Justin McHood is a managing partner at Suited Connector and has been recognized by national media outlets as a financial expert for more than a decade.

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