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Couple with mixed scores debate best way to land mortgage

Erica Sandberg

April 3, 2015

QHi Erica,

My wife and I want to buy a house, but the bank said my score is too low to get a really good deal on rates (it's 650). That's because I was late on some credit card payments when I was single. My wife's is fine (790). Would it be better to get a mortgage just in my wife's name, or should we wait until I improve my score? We really want to get in a house before the prices go up and get out of our reach. –Miguel

ADear Miguel,

Ideally you would buy now, while there is a robust inventory of homes within your financial capability. After all, no one knows when property prices will escalate (or decline, for that matter).

As noted, though, your FICO scores — the scores most commonly used by lenders — are on the low side. They're not bad, but fair. That does not mean you'd automatically be rejected, just that the mortgage you'd be offered as a solo buyer (or if multiple buyers had similar scores) would have a higher than desired interest rate, which would add to the cost of the loan.Ask Erica

But because your wife's scores are so high, you should be able to qualify for a decent mortgage. When two people apply for a mortgage together, the lender averages credit scores. Since yours is 650 and your wife's is 790, the mid-point is 720 — high enough for a good interest rate. You might check with a couple of other lenders to see what they say about available rates. Policies differ, and another lender may be able to give you a better rate with your combined score. Just make sure any inquiries are made within a 45-day period so your credit score isn't impacted.

Regarding your wife applying for the mortgage alone, sure, she can do that. The lender would only assess her FICO. The problem is, if you go this route, the lender would only consider her income when deciding how much of a mortgage payment you can afford, which means you may need to buy a cheaper house than if both incomes were considered. But if her income is sufficient to qualify for a home in the price range you both want, there is nothing that says you can't go that route. You may choose to refinance the loan at a later date when your scores are higher in order to have both names on the mortgage, but that can be expensive, especially if interest rates climb up from where they are now.

Even with the averaged out FICO, it would be wise to try to bring your own scores up. You want prospective lenders, insurance companies and others to have as much confidence in you as possible, so they'll offer the very best terms. This way you won't have to overpay even by a little.

Luckily, there are ways to hike your score relatively quickly. Here's what you need to do.

Pull your reports. Access all three consumer credit reports from AnnualCreditReport.com and see exactly what's going on. TransUnion, Experian and Equifax are the major credit bureaus, which collect the data for credit reports. Lenders may choose FICO scores from any of them, so you need complete information.

Dispute data that should not be listed. Credit scores are derived only from the financial information on credit reports, and egregious mistakes do happen. For example, maybe you deleted a balance but it's still showing as unsatisfied debt, or negative information that should have aged off (such as collection accounts and late payments older than seven years or a Chapter 7 bankruptcy older than 10 years) still appears. Dispute any legitimate errors, and your FICO will rise when the investigation concludes, which is in about 30 days. Heads up: Pending disputes can affect your ability to borrow, so make sure all disputes are resolved before applying for a mortgage.

An alternative is “rapid rescoring,” a service provided by  some mortgage companies. Essentially, it's a way to have your score updated faster, so any items in dispute don't ruin your chances of getting a home loan. Or, you may want to pay down some high balances you may be carrying and have that reflected quickly in your credit scores. Talk to your lender to see if that is an option you'd like to explore.

Fix genuine problems. Conversely, you may see evidence of problems that are correct. These could be accounts that were paid late, charged off or sent to collections. If they're young, especially within the last couple of years, pay them off now. If a spotty payment history is evident, you'll have to get back on track, beginning with this payment cycle. Pay on time from now on. It will take about a year to establish a responsible payment pattern, but at least you'll get a start on it. Finally, you may owe too much on your credit cards. In that case, whittle it down, so the lender doesn't think you've already maxed out and can't afford to borrow more. Ideally, have your card balance as close to zero as possible and at least under 30 percent of your available credit.

However, ideally, balances on cards should be paid down several months in advance of applying for a home loan. Lenders want to see that you are careful and conservative with your money. Any sudden changes in your finances can raise red flags in a loan application.

With effort and a little time, you should be able to increase your FICO scores to the point where you won't drag your wife's impressive numbers down too much, so you'll both come out ahead!

Got a question for Erica? Send her an email.