Mortgage lenders evaluate credit a bit differently than they did several years ago. Prior to the introduction of credit scoring, a lender’s underwriter would review each credit entry line by line. The underwriter would look at credit limits and account balances, if there were any payments made 30, 60 or 90 days past the due dates. Collections and charge-offs would be listed as well as any past bankruptcies or foreclosures. All of these entries would be date-sensitive. As it relates to negative entries, many lenders would pay less attention to late payments that occurred two or three years ago as long as there hadn’t been any late payments made since then.
Today, credit scoring essentially replaces the line-by-line method. The algorithms that calculate these scores take all of that information plus more to arrive at a three-digit score. Depending upon the loan program being applied for, the credit score must meet minimum standards. There are three credit scores but they all use the same basic algorithm.
Each credit score comes from one of the three main credit repositories of Equifax, Experian and TransUnion. The scores will be similar but because of different reporting times of businesses that utilize credit and the fact that not all merchants subscribe to all three the scores will rarely be the same. Someone applying for a mortgage might have scores reading 744, 751 and 730. The scores aren’t averaged together but instead, lenders will use the middle score for qualifying purposes. But what happens when two people apply for a mortgage together?
Good question but lenders follow the very same procedure for two or more applicants as they do with just one. However, the lender will look at the middle scores of each borrower and use the lowest of the group. If for example, your middle score is 750 and your spouse is 720, the 720 number is the qualifying score, ignoring the 750 score. This may or may not seem fair to some but when applying for a mortgage together, the risk a lender takes on is extended. However, the risk can take on a whole new meaning when one of the spouses has damaged credit. Your 750 score might be offset with a 540 score. Again, when applying for a mortgage together, the lender will use the lower of the two of 540. Few loan programs allow for such a low score and for those that do can require a down payment more than the allowable minimum.
But all is not lost. There’s a term in the mortgage industry called a “non-purchasing spouse.” This term applies to a couple buying a home together but leaving the spouse with damaged credit off the loan application entirely. The spouse left off the loan can however still be on the title and still claim ownership. It’s just that the spouse’s financial information such as credit and income is left off the application entirely.
This is a workaround but there are some drawbacks, primarily meaning the purchasing spouse won’t be able to use the other spouse’s income in order to qualify for the mortgage. If both incomes were needed to qualify for the mortgage and suddenly one income has vanished, there’s not a whole lot that can be done other than waiting and repairing the credit that’s creating the issue or making a larger down payment in order to get to the qualified amount. However, if the purchasing spouse can qualify on his or her own, the sale can close.