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My girlfriend and I are purchasing a house. We were told that it would be better to have the mortgage solely in my name as the only account holder due to her credit score.

My question is, between two people purchasing a house together, one with good and one with bad credit, will having both persons on the loan raise the interest rates. Is there an order of primary/secondary consigners that would help the interest rates? Or is it truley better to simply leave the bad credit completely off the mortgage?

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    Would you rather lend to 1) a single short history unknown borrower or 2) a short history unknown borrower and someone proven to be bad at managing debt? – quid Aug 23 '16 at 22:09
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    The lowest credit score is used exclusively. I saw this in a policy document that did an investigation, not in official company or industry credit evaluation documents. This will mean that you get a higher rate, if you get approved at all. – CQM Aug 23 '16 at 22:28
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    @quid I would think having both would either be better, as there's more fallback, or not have an impact. Certainly can't figure out why there's a negative impact though. Unless CQM is right. – mindfullsilence Aug 23 '16 at 23:16
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    Please see past answers here about cosigned loans before doing this, so you are going into this with your eyes open about the ways it can go bad. You must discuss in advance who owns what and how you will unwind this if you separate, and you must get a lawyer to put that into enforceable form, or this can very easily become a disaster waiting to happen. When doing business with friends, treat it as business; that's the only way to keep it from destroying the friendship. – keshlam Aug 23 '16 at 23:27
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    @Xalorous its the result of what banks are doing right now based on a combination of macroeconomic pressures and their own internal risk profiles and the discretion of underwriters at the bank. So "lender policy" – CQM Aug 24 '16 at 1:26
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between two people purchasing a house together, one with good and one with bad credit, will having both persons on the loan raise the interest rates.

If the house deed is on both names, generally the Bank would insist the loan should also be on both of your names. This to ensure that Bank has enough leverage to recover the house in case of default. If one of you has bad credit, bank would raise the interest rate, assumption that bad credit would drag the good credit and force him to some activities / actions that could stretch the finance of one with good credit. If timely payments are not made, it would make your good credit to bad.

If the house deed is on only on your name and you can get the loan on your own, this would be a better position.

If the house deed is on only on your name and you would like to loan to be on both names, then the positive side is credit score of the person with bad credit would start showing improvement over period, provided both of you make timely payments.

As pointed out by keshlam, there are enough question where people have entered into agreement without deciding what would happen if they separate. There is no right / wrong answer. It would be best you decide how it would be with respect to the ownership in the house and with respect to payments and if in worst case you part ways, how the settlement should look like.

  • FYI: For the Deed you are right. But you can do this on the Title. You can both be on the title and only one of you on the mortgage. I do this with my wife on every rental we purchase. 1 of us is on the mortgage (which ever one has the strongest credit at the time), but both of us are on the title, always. – maplemale Dec 1 '16 at 16:55
  • @maplemale Could you edit the answer to make it more accurate. – Dheer Dec 2 '16 at 4:29
  • There are two parts to financing real estate: a mortgage and a promissory note. The mortgage gives the lender authority to take the property if the terms of the promissory note aren't met. It gets recorded at the registry of deeds, so that future buyers know about it. The promissory note is the promise to repay the loan. The mortgage should be signed by all of the property owners; if it isn't, the lender will have a hard time reselling the property in the event of default. The note can be signed by whoever is responsible for the payments, regardless of who signs the mortgage. – Pete Becker Jul 6 '18 at 10:42
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Generally speaking the lower credit score trumps. In the case you cite, the lower credit score will prevail. However, you may need to do exactly that in order to qualify for the loan income wise.

There are two factors when obtaining a mortgage, really all loans, but more so with a mortgage: the likeliness to repay (credit score), and your ability to service the debt. This last one is a combination of income and debt-to-income ratio.

If you don't have enough income to qualify for the loan or fail to meet the debt to income ratio, you may have to use your GF's income to qualify despite her poor credit.

You might want to see past posts about buying property with non-spouses. It could work, but generally it requires a lot of legal work before closing on the deal. Avoiding this will lead to tales of woe.

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    There's a bit of a chicken-and-egg aspect of this situation. Because lenders will use the lowest credit score, applicants will only include the lower-scored applicant if they need her (or his) income to meet the debt to income ratio. Because applicants will only include the lower scored applicant if they need to, lenders know that both incomes will be required to service the debt; so if either fails to keep up with their credit obligations, the mortgage will become delinquent. – stannius Aug 24 '16 at 18:59
  • So if someone with bad credit applies, adding someone with good credit as co-signer won't help? – Acccumulation Sep 17 '17 at 0:48
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Last time I applied for a mortgage I asked the loan officer about this. They advised that on a joint application they take the "lower middle" score. What that meant was they would get credit scores from the three major (US) credit bureaus, for both me and my cosigner, discard the highest and lowest for each of us and then settle on the lower of the remaining two.

For example:

Bureau     | Signer's score | Cosigner's score
Equifax    |      730       |      680
Experian   |      740       |      710
Transunion |      750       |    **700**

Signer's middle score is 740, cosigner's middle score is 700. So, the lower middle score is 700.

I'm not sure if all loan companies use this method, but mine advised it was pretty common method among the big mortgage providers at least.

If the company you quote with uses this method, you can be sure that the lower credit rating of your co-applicant will mean they base their offers on her score, not yours. But it will be her middle score, not her worst. Usually all three bureaus report a similar score for any particular individual anyway so this factor doesn't make a huge difference, but it might help a bit, especially if one of the bureaus has errors on your report and the other two don't.

If you have sufficient income to qualify for the mortgage you need on your own, you'd probably be better off applying on your own. A higher score will qualify you for better rates, and for something big and long term like a mortgage every fraction of a percent difference can translate into hundreds of dollars over the life of the loan.

If you can't qualify for the mortgage on your sole income then it's a moot point, you'll have to include a cosigner. However, there are steps you can take that will provide an almost immediate boost to your girlfriend's credit score; most notably, paying down revolving debt. If clearing all credit card debt is not possible right now, try to at least re-balance things so that each revolving account is using a similar percentage of its respective credit line (as opposed to some small balances and some maxed out). And the more you can bring down utilization overall, the more the score goes up. Doing this right before the end of a credit card billing cycle (i.e. don't wait for the statement to arrive - the balance will already have been reported by then) will ensure a lower balance being reported to the bureaus (note, a minimum payment will still have to be made after the statement is generated, so if you're budgeting, reserve some for that payment too).

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