How Bad Credit Affects Mortgage Applications in a Married Couple

When one spouse in a married couple has a considerably better credit score compared to the other, it raises questions about how this disparity might impact their ability to secure a mortgage. This article aims to provide clarity on how the credit scores of both spouses affect the mortgage application process and the potential impact on loan terms and eligibility.

Understanding Credit Scores and Mortgage Combinations

One spouse may have a robust credit score, such as a score of 725, while the other has a blemished credit score, typically below 650. In such instances, how can a couple navigate the complexities of obtaining a mortgage? Let's dive into the details.

Dealing with a Consistent Good Credit Score and Bad Credit

A credit score of 725 represents 'Good' credit. For a score in this range or higher, mortgage lenders consider taking the average of the credit scores of both co-applicants if the disparity is significant. If one spouse has a score of 725, and the other has a score that falls below 650, the lower score is usually the deciding factor. However, if the bad credit score is above 650, lenders may take the average of the two scores.

For example, if the credit scores are 725 (the good credit spouse) and 650 (the bad credit spouse), the average score would be 687.5, which is still below the 'Good' threshold for mortgage underwriting. Therefore, the average score can have a significant impact on the eligibility for a mortgage and the terms of the loan.

Mortgage Lending Processes and Score Calculation

Mortgage lenders use something called the 'lowest middle score' to determine the overall eligibility for a mortgage loan. This involves averaging the middle score of each spouse. For instance, if a couple has the following credit scores from the three major credit bureaus:

Co-applicant 1: 710, 680, 700 (average middle score: 697) Co-applicant 2: 550, 570, 530 (average middle score: 550)

In this scenario, the lowest average middle score, 550, would be the determining factor, significantly impacting the eligibility for a mortgage loan.

Impact on Mortgage Terms and Eligibility

Even if the good credit spouse has a decent score, such as 725, placing the lower score (below 650) in play can result in a higher interest rate and less favorable loan terms. The disparity in credit scores can lead to a higher risk profile from the lender's perspective, thereby affecting the overall terms of the mortgage.

Mortgage Lending Guidelines for Bad Credit

It's important to understand the ranges of credit scores for different categories:

Excellent Credit: 800–850 Very Good: 740–799 Good: 670–739 Fair: 580 - 669 Poor: 300 -579

Anything below 580 is generally considered bad credit. This score range can be further broken down into various degrees, each with its own set of challenges in obtaining a mortgage. For example, to qualify for an FHA mortgage with a down payment of 3.5%, a borrower must have a minimum credit score of 580. For larger down payments, the minimum score drops to 500, but this is the absolute minimum.

Conclusion

While a spouse with a good credit score can still potentially qualify for a mortgage, the presence of a score below 650 can significantly impact their eligibility and the loan terms. Understanding these factors can help couples make informed decisions and navigate the complexities of the mortgage application process more effectively.