Monday, July 13, 2015
Who Has to be on My Loan?
WHO NEEDS TO APPLY OR BE ON A MORTGAGE LOAN IN WASHINGTON STATE?
We get many e-mails from Brokers around the state regarding credit and credit matters. They come with a variety of fact patterns. This past week the whole issue of who should or should not be included in a mortgage application especially in the State of Washington which is a community property state. This gets lots of Brokers mixed up as they think that ownership and borrowing go hand in hand. They can, but they don’t have to.
It generally can make sense for married spouses or partners to apply together for a mortgage loan. Again, they DO NOT have to. That way the mortgage lender can use the parties’ combined income to determine such things as lending amounts available.
However, that may not always be the best course.
WATCH OUT FOR CREDIT SCORE IMPAIRMENT…..IT MAY MAKE BETTER SENSE TO GO IT ASLONE….
If the credit score of one of the parties is deemed too low to help qualify, then it may make better sense for the one party to go it alone, however, then you only have the income of one party to count. You can’t have both.
Now remember, it doesn’t matter how high the one party’s score is (and that was the question to us this past week), it matters ONLY that the other score is too low. In short, one spouse’s or partner’s lower credit score MAY cause a higher interest rate as well as not getting the loan at all. This is an important analysis and one commonly misanalysed by many consumer borrowers.
Last week I wrote also on credit scores as we had lots of questions on how they are designed. Credit scores were designed by a company to provide an easy basis, just by looking at a number, to determine credit risk as opposed to studying a huge amount of credit data and trying to make an individual evaluation. Auto dealers rely heavily on credit scores. “FICO” relates to the company that pioneered this approach that has taken hold today.
Our conversations with many local lenders speak of a FICO score of 740 or higher to be a strong score. This is where you will see your customer get the lowest rates.
Borrowers with credit scores under say 640 on the FICO scale will generally struggle to qualify for a mortgage loan without having to pay higher interest rates. In fact, they may not be even able to qualify for a mortgage loan at all!
THERE ARE GENERALLY THREE CREDIT SCORES…
You may be surprised to know that when parties combine together and make application for a purchase money mortgage that the mortgage lenders generally do not consider all scores. One would think that they would.
This is hard to believe, but when you stop to think about it from a credit granting perspective, they focus on the borrower with the LOWEST CREDIT SCORE!!!
Every one of us has three (3) Credit scores. There are three (3) as I pointed out in my article last week. If you did not see that installment each credit bureau prepares their own and there are differences. When couples apply for a mortgage loan the mortgage lender will only consider the “lowest middle credit score” between the applicants.
Let’s take an example that I obtained from a local mortgage lender:
Let’s say we have credit scores of 740, 780 and 760 respectively from the three bureaus. Let’s say your spouse or partner has scores of 640, 620 and 610. According to the processes, your mortgage lender will use that 620 score only when determining how likely you are to be current. In fact, you may NOT get a loan! If you do, you may pay a higher rate with higher costs.
If you are the only wage earner and your spouse has a low score, then it is a no brainer, apply only in your name. However, keep in mind that the good news is that the bad score of your spouse can’t penalize you, but no income from that spouse is counted toward the family income for loan amount purposes.
If one spouse has too much debt and not enough income, it can also in that instance be smart to go it alone. Mortgage brokers tell me that they generally want your TOTAL MONTHLY DEBTS INCLUDING THE MORTGAGE to equal no more than 43% of your gross monthly income.
Foreclosures, bankruptcies, short sales and judgments may also be a reason to leave a spouse off the mortgage application.
LASTLY, CAN THAT OMITTED SPOUSE BE ON TITLE (AND NOT ON THE LOAN)?????
We welcome non-borrowing spouses to be on title in the state of Washington. Mortgage lenders will go along with it. The non-borrowing spouse will NOT sign loan documents, but will sign the Deed of Trust acknowledging a waiver of homestead and a couple other loan papers to facilitate them also being in title.
Today's blog courtesy of McFerran & Burns