Married couples who are refinancing their home or purchasing a new one do not have to include both people on the mortgage. In some cases, including both spouses on the paperwork can cause more setbacks. The most common setback is when one spouse has a significantly lower credit score causing the interest rate to rise.
It is becoming increasingly more common for married couples to have only one spouse on the mortgage and there are an increasing number of loan programs that offer very low rates and low down payments making this easier for married couples to do.
Pros of One Spouse Only on the Mortgage
Avoid Credit Rating Issues on the Application
Having a low credit score can bring significant issues to a loan application. Lenders pull both borrowers’ credit scores when a married couple fills out a loan application. In this case they take the lower of the two scores or the middle of three scores as a final credit assessment of applicants. This is called the “representative” credit score. Lenders only make an offer based on the lowest score they pull up.
A low credit score results in a higher interest rate offer, a higher down payment request, or it could result in a loan denial altogether. Credit scores lower than 580 have a higher chance of denial.
Save Money on Mortgage Interest
If one spouse has a very high credit score, the higher credit score may be eligible for a lower rate. This can save homeowners several thousands of dollars in mortgage interest in the long term.
The Federal Reserve Conducted a study about mortgage costs a few years ago and found that 10% of the over 600,000 loans that they studied could have qualified for significantly lower interest if just one spouse has applied. Over 25% of these loans could have significantly decreased loan costs by doing so.
Preserve Assets if One Spouse Has Significant Debts
A home is an asset that can have a lien placed on it or be taken away in severe cases. If a spouse has student loans and is no longer paying on them, for example, this could result in a lien being placed on the property or worse.
Buying a house in only one spouse’s name protects it from creditors. If the debt was taken on after their marriage to the applicant on the mortgage this protection may not apply though.
Simplify Estate Planning
Having the home in one name simplifies the estate planning. It can be especially helpful if this is a second marriage. If you are planning to leave the home to your children from a previous marriage, it is easier to do that without the name of the second spouse on the mortgage.
Less Income of Applicants Means Lower Qualifying Amount
The biggest drawback to only one spouse being on the mortgage is that only one income can be used on the application. If you are refinancing, the refinance will only be possible if the spouse on the application can prove they make enough money to cover the new mortgage costs on their own.
The more income that is stated on an application, the higher the amount of money a bank will lend (as long as the credit score is acceptable). This is why couples applying together can qualify for a larger loan amount because both incomes can be used.
Potential for a Higher Debt-to-Income Ratio
Leaving one spouse off the mortgage can increase the debt-to-income ratio on the application. This is a key factor lenders look at when it comes to assessing the risk of lending someone money. It compares the gross income to the amount of money going out to debts every month. If a person’s debts are at or above a certain percentage of their income that the bank deems acceptable, the bank is more reluctant to make an offer.
For more information on applying as a single person or a married couple for a first-mortgage, refinance, etc. And information on your mortgage options in Mission Viejo and California please contact me any time.