How should couples with different credit scores and jobs apply for a mortgage? We are trying to decide if we should apply for a mortgage as co-borrowers or if I should apply for the loan on my own.
Your question raises two issues. The first issue is the discrepancy in co-borrowers' credit scores and the second issue is differences in their employment type and history. I address each issue below.
When two people apply for a mortgage as co-borrowers, the lender uses the average median credit score for the applicants for the qualification process. If an applicant has three credit scores, the lender uses the middle score to determine the average. If an applicant has two scores, the lender uses the lower score to calculate the average. The higher the credit score used by the lender, the lower your mortgage rate, and the lower your score, the higher your rate.
If one co-applicant has a significantly lower credit score than the other, they may end up paying a higher mortgage rate and monthly payment because the lower score brings down their average. For example, if the middle of your three scores is 620 and your co-borrower's middle score is 740, the lender uses the average score -- which is 680 in this case -- to assess your loan application. Please note that if you are married, the lender pulls a joint credit report for both borrowers but this does not change how lenders evaluate your scores.
So the impact of a discrepancy in credit scores for two borrowers depends on the specific scores. If one applicant's score is in the high seven hundreds or above and the other applicant's score is in the mid-to-low 700s, the difference in scores may not be a significant issue because both borrowers have relatively high scores.
A score of 700 or higher usually enables you to receive a lender's lowest mortgage rate, so depending on both your and your spouse's scores, you may be able to qualify for the best loan terms if you apply as co-applicants. When you speak with lenders you can confirm the minimum score required to receive the most favorable loan terms as this guideline can vary.
Another scenario to consider is if one applicant has a high credit score but the other borrower has a low score, which requires them to pay a higher mortgage rate. In this case, the difference in scores may end up costing you a lot of money, plus you may not be eligible for certain loan programs, depending on the specific score.
So if the difference in a couple's credit scores is significant and the applicants are in different credit rating bands -- for example one person has excellent credit while the other person has a below average credit -- then it may make more sense for the person with better credit to apply for the mortgage as a sole applicant. Please note that if you apply for the loan as as sole borrower the mortgage you can afford is only based on your monthly income. Your spouse's income is not included in your loan application which may reduce the mortgage you qualify for.
The second issue -- a difference in employment type and history -- likely present a more significant issue when you apply for a mortgage. For example, if one of the borrowers is self-employed, most lenders require a two year job history, as verified by the applicant's tax returns. In some cases an employment history of only a year is required if the applicant previously worked in a similar field and earns a consistent amount of income.
It can be a challenge if a relatively short self-employed work history is coupled with another issue such as an extended employment gap. In this case, my sense is that the lender is not going to include that borrower's income in the loan application.
A lender may be willing to work with a short job history or a lengthy employment break but both of these issues combined may be too much to overcome. In this scenario it may better if you apply for the mortgage as a sole applicant.
Use ourTwo Person Mortgage Qualification Calculatorto determine what size mortgage two people can afford based on their monthly gross income and debt payments
My recommendation is that you contact multiple lenders in the table below to understand how they would handle your unique situation. Explain your and your spouse's circumstances and determine if it makes more sense to apply for the loan as co-borrowers or as a sole borrower. My initial reaction is that it may be best for you to apply as a sole applicant but your circumstances are relatively unusual so you do not know definitively until you speak with lenders.
When you contact lenders tell them you want to have a preliminary conversation about your financing options. Request that they not pull your credit report until you have determined the best approach and you are ready to move forward with the loan.
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Sources
"B3-5.1-02, Determining the Representative Credit Score for a Mortgage Loan." Selling Guide: Fannie Mae Single Family. Fannie Mae, August 30 2016. Web.
"B3-3.2-01, Underwriting Factors and Documentation for a Self-Employed Borrower." Selling Guide: Fannie Mae Single Family. Fannie Mae, December 4 2018. Web.
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