When two people file for a mortgage jointly, it’s important to understand that it’s not necessary for those two people to be married. In fact, more and more people apply to finance a home together without having officially ‘tied the knot.’ It’s just not necessary. But doing so also means both parties need to be clear early on that they’re both going to be responsible for the mortgage payment. Adding two or more people on a mortgage application means there will most likely be more income. And more debt. But there’s more to it. It also includes how the couple will take title.
Further, all financial aspects of everyone on the mortgage application will be evaluated. When there are two or more people applying for a mortgage and buying a home, there will be multiple credit scores and credit reports. When there are two or more applicants, the lender will use the lowest middle score presented. There are three main credit repositories, Experian, TransUnion and Equifax. All three use the very same algorithm when calculating the three-digit score. They will be similar but rarely exactly the same. This is due to different reporting periods and businesses that do not report to all three agencies.
Let’s say one applicant’s credit scores are 742, 749 and 726 and the other trio of scores is 750, 775 and 730. The first applicant’s middle score is 742 while the second applicant’s middle is 750. The qualifying score in this scenario is then 742, being the lowest of the two scores reported. This can be a problem if the reported scores for one borrower are 580, 619 and 590. The same two people can be on the application and the qualifying score would be the lower of the two middles, or 590. One applicant’s scores can’t offset the other’s damaged scores nor are they averaged together.
In this scenario, if one individual has scores to low to qualify for the mortgage, the person with the low scores can be removed from the loan application entirely in an attempt to qualify for the new mortgage with just the one income. If both incomes are needed and one person has poor credit, this can present a challenge.
The same goes for income. The total income for all applicants can be used in most cases. But if someone on the application is self-employed and their business shows a loss for the past two years, that loss is deducted from the overall income on the application. In this scenario, removing the individual with the losses from the application can rectify this situation.
Now, as it relates to taking title. Taking title under ‘joint tenancy’ is the most common for married couples and domestic partners. Joint tenancy means there is an inherent right to survivorship, meaning if one of the individuals die, full ownership automatically transfers to the surviving partner. Another way to take title is called ‘community property.’ In California and in other community property states, someone that is married or registered domestic partners are treated as one borrower as it relates to ownership. In a community property situation, of one of the applicants dies, that individual’s ownership doesn’t automatically transfer to the remaining spouse or partner and can be subject to probate. However, taking title as ‘community property with right of survivorship’ does mean ownership automatically transfers to the other owner(s).
Tenancy-in-common is another form of ownership but unlike joint tenancy and community property, the degree of ownership can be different. One individual might own 15% while another owns 30% with the rest being distributed to others listed as ownership. If one of the owners passes away, that ownership is transferred to the individual’s heirs or whoever the individual names as an heir in the form of a will.
It’s typically an automatic that a married couple or domestic partners who apply for a loan together will have both their incomes, credit and debts lumped together when the loan application is submitted and evaluated. But there is no requirement the couple must be married.
If you’re not sure, just give me a call or send an email and tell me your situation and I can provide the needed guidance and answer questions about both ownership interests and qualifying for a mortgage with others.