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When you need to borrow money for the purchase of a home you’ll be living in with a partner, it’s important to think about whose name will be on the financing application and mortgage loan. Depending on the scenario, there are pros and cons to buying and sharing a home with a spouse, non-spouse, or housemate.
Take the time to better understand how your relationship status can impact your chances of securing a mortgage loan by reading on for key insights and recommendations.
Your relationship status matters
Seeking to secure a mortgage loan with a partner involved? The good news is that a mortgage lender cannot refuse to loan you money because you are divorced, widowed, or unmarried.
In fact, a creditor cannot discriminate on the basis of marital status or gender, according to the Consumer Financial Protection Bureau.
However, a lender will look closely at any co-borrower’s or cosigner’s name on the mortgage loan, including the name of any spouse or partner. That person’s credit rating, debt-to-income ratio, and other financial factors could harm your ability to be eligible for mortgage financing.
Pros and cons of relationship status when applying for a mortgage loan
Let’s take a closer look at how different relationship scenarios can positively or negatively affect mortgage loan approval, rates, and terms.
Married couples opting for joint names on a mortgage loan can benefit from potentially improved rates, terms, and borrowing limits because their combined incomes and credit scores/histories are evaluated by the lender. Their combined earnings and savings can help them afford mortgage payments and qualify for the loan.
If they repay the mortgage loan punctually and responsibly, both can see their credit scores improve over time.
“But if one spouse faces financial challenges or has a low credit score, their collective chances of getting loan approval and securing a more favorable interest rate can be negatively impacted,” cautions Joseph Melara, a financial expert and owner of Residential Brokers.
Note that when both spouses apply together for financing, the lender will carefully review each party’s three FICO credit scores (one from Equifax, one from TransUnion, and one from Experian). The lender will only consider the lowest middle credit score between both parties.
So, for example, if you have credit scores of 690, 700, and 720, but your wife or husband has scores of 590, 610, and 620, only your spouse’s 610 credit score will be used to decide if you are collectively eligible for a loan and at what specific interest rate.
Also, be aware that if both you and your spouse apply for and sign as co-borrowers on the loan, each is equally responsible for repayment of the mortgage debt. If you both fail to repay your debt on time or in full, each of your credit scores/ratings can be harmed.
“But if only one spouse—assumedly the one with better credit and financial health–applies and has their sole name on the mortgage, only that person is responsible for mortgage payments and risks credit harm in the event of missed payments or loan default,” explains personal finance expert Andrew Lokenauth, owner of TheFinanceNewsletter.com.
Having a non-spouse partner
Plenty of buyers today are pursuing financing for a home purchase with a non-spouse. This arrangement has its pluses and minuses when it comes to mortgage matters.
For starters, as with married couples, the combined incomes and savings of both parties can help them qualify for and afford the loan. The lender will review the credit scores and credit histories of both co-applicants.
“Buying a home with a non-married partner on the mortgage loan allows both to contribute financially and co-own the property. However, potential cons include financial disputes and strain in the relationship if one partner fails to meet their financial commitments or the two want to break up, which could also lead to serious legal complications – especially if a home sale is involved,” Melara adds.
But if one partner’s credit scores/rating are poor, that can nullify the advantage of the other partner’s better credit and income. In this case, it’s recommended that the latter party apply for the loan alone.
If only one name is on the mortgage application/loan but that person wants to cohabitate with a partner, the former retains sole ownership rights as well as full financial responsibility for debt repayment. This single borrower would need to qualify for the loan by themselves.
“Being single with only one name on the mortgage simplifies matters, allowing you to focus solely on your financial situation,” continues Melara. “This approach is advantageous when you have good credit and income. But it means taking full responsibility for the mortgage. And you won’t reap the benefits of combined incomes to help you qualify for the loan and being approved for possibly a larger loan amount.”
If you’re divorced from a former spouse and want to apply for a mortgage loan, the lender can’t use this status against you. However, they can scrutinize your earnings as well as debts like alimony or child support payments to decide if you can afford mortgage financing.
If these divorce-related payments push your debt-to-income (DTI) ratio above 43% of your gross monthly income, you may find it challenging to get mortgage approval. You may need to seek a more creditworthy loan cosigner who can help you get approved.
Ownership and property rights issues
Applying for a mortgage is different from property rights. One or both parties can be on the title, which determines ownership.
When one party is on the title (sole ownership), only that person has rights to the property – meaning they can refinance or sell the residence alone without permission from the other partner.
In a joint tenancy arrangement, both partners are on the title and both have equal shares and rights to the equity of the property, with ownership automatically transferring to the surviving co-owner if the other dies.
“There are also states that have community property laws, such as California. Here, property acquired during marriage is considered joint, and both spouses share equal ownership and responsibility – even if only one party is on the mortgage,” says Patrick Freeze, president of Bay Property Management Group.
In states with tenancy in common laws, both partners can share a vested financial interest in the property, which isn’t required to be equal.
In other words, each co-owner holds individual titles to portions of the property that aren’t necessarily equal. Case in point: One party could retain 70% ownership of the residence versus 30% ownership by the other partner.
Each partner can pass on their portion of the title to a person of their choice, such as a beneficiary.
“Ultimately, whether both spouses should be on the title and/or deed will depend on your legal and financial goals,” says Melara. “Having both names on the title typically means both have ownership rights and both are responsible if you sell the property or refinance the mortgage – protecting the interests of both spouses.”
» MORE: See today’s refinance rates
The bottom line
Whether or not you should apply for a mortgage loan with a spouse or partner will depend on many different factors. When in doubt, consult closely with your lender, Realtor/agent, real estate attorney, or a certified financial planner.
And think carefully about future possibilities: What happens if you split up with a co-borrower or co-owner? What if the other party can’t live up to their agreed-upon financial responsibilities?