Getting a mortgage, even as a married couple, can seem quite daunting. Even refinancing your current home can be done with one spouse on the mortgage. Although you can get a mortgage with only one spouse you should understand the drawbacks and benefits.
Is it always better to have both spouses on the mortgage?
You’d think that having both spouses on a home loan is the best option, but it’s not true. There are times when it’s a clear disadvantage to having more than one spouse on a mortgage. For example, if one spouse had recently filed for bankruptcy, the low credit score could jeopardize the mortgage approval or result in a higher interest rate.
Therefore, if one of the spouses has a low credit score or is currently unemployed it might be easier to get mortgage approval with only the other spouse on the home loan application.
What are the benefits of having one spouse on the mortgage?
There are several long-term benefits of having one spouse on the mortgage. When there is only one spouse on the mortgage, you might get a lower interest rate, improve your chances of getting approved, or save money. But there are also estate planning benefits with one spouse mortgages.
One spouse mortgage may help you qualify with bad credit
When only one spouse applies for a mortgage, the bad credit of the other spouse won’t be a problem. This tactic helps spouses avoid credit issues on the mortgage application.
Even if one spouse has perfect credit, the bad credit of the other spouse could cause serious mortgage problems. But, if you don’t submit a joint mortgage application, poor credit isn’t going to stop you from getting approved for a mortgage.
“Representative” credit score and joint mortgage application
That’s because lenders pull a “merged” credit report on a joint mortgage application. The three credit reporting agencies report both applicants’ credit history and scores. But unfortunately, they use either the middle of three scores or the lowest of two scores to evaluate home loan applications. The credit score they use is to evaluate the creditworthiness of the couple is called the “representative” score. So, when spouses apply together for a loan, a serious problem can arise when one person on a joint application has poor or damaged credit.
Even more damaging is that mortgage companies don’t average out the representative scores with two applicants. Instead, they discard the better applicant’s FICO score and make a loan offer based on the lower credit score.
So, the lower credit score of one spouse could result in a higher interest rate. Even worse, if your spouse has a poor credit score, you might be unable to secure a mortgage to buy your dream home.
While a credit score above 750 is considered good, if one spouse has a credit score below 580, the mortgage application will likely get denied. Therefore, if one spouse has such a low score, it’s smarter for the other spouse to apply alone.
One spouse mortgage for a lower mortgage interest rate
A one spouse mortgage could save you thousands on your home loan in the long term. For example, if one spouse has less than good credit, but the other has a high credit score, the higher-credit spouse might secure a lower interest rate mortgage.
Recently, the Federal Reserve has reported that 10% of all mortgage holders could have paid 0.125% less by a one spouse mortgage. Thus, when the more qualified spouse applies for the home loan, the couple could save thousands over the life of the mortgage.
The mortgage fees are also higher for lower credit score applicants. For example, if one spouse has a 680 FICO and the other has a 702 FICO, the couple would save hundreds in loan fees for every $100,000 borrowed due to Fannie Mae’s fees sub-700 credit scores.
What’s the main drawback of a one-spouse mortgage?
The main drawback to a one spouse mortgage is that the sole borrower must qualify without the other spouse’s income. So, to make this strategy work, the spouse on the mortgage needs a high credit score and enough income to get approved.
One spouse mortgage as asset protection
Unpaid bills, collection, and creditors due to the poor credit of one spouse could jeopardize your home. Your house is an asset, and liens can be attached to it. A home can also be confiscated in some cases. For instance, if your spouse has unpaid judgments, unpaid child support or taxes, or defaulted on student loans, he might be vulnerable to asset confiscation.
One spouse mortgage can protect your home from creditors
By getting a one spouse mortgage, you protect your home from creditors. Unfortunately, you may not enjoy this protection if your spouse incurred the debt after marrying you.
Also, if you’re buying a home with the money you earned before marrying your spouse, you should keep it a sole-and-separate house.
Simplify estate planning with a one spouse home loan
You can simplify estate planning by having the home in your name only. This is especially true if this is your second marriage. For example, if you want to leave your home to your kids from your first marriage, it’s easier to do when you don’t have to untangle the rights of your current spouse.
One spouse mortgage is a proactive divorce strategy
Naturally, you don’t plan on divorcing your spouse when you marry, but stuff happens. But if divorce is unavoidable, and the mortgage is in your name, having a one spouse mortgage will help you maintain control of your home.
What do I need to qualify for a home loan?
How do lenders determine if you qualify for a mortgage? Among other things, mortgage lenders will consider your employment history, credit score, and your assets. Lenders analyze your debt-to-income ratio and the size of your down payment as they evaluate your mortgage application. Most lenders want to see a stable employment history and a good credit score. Lenders also want to look at your total debt, such as student loans, car payments, or credit cards. Basically, your debts must be at a manageable percentage of your pre-tax income.
Which mortgage loan is better?
When buying a house, you have many mortgage options. Which mortgage loan is better depends on your unique situation.
You can choose from the following mortgage options, and you can decide which is better for you:
- Conventional mortgage – A conventional mortgage is a popular option for borrowers with stable employment and income history, the ability to make a sizable down payment, and good credit. If you want to qualify for a conventional home loan backed by either Freddie Mac or Fannie Mae, you usually have to make a 3 percent down payment.
- FHA home loans – The FHA mortgage route is an excellent option for low-to-moderate-income-first-time-homebuyers. However, this is a perfect option for people who are unable to qualify for a conventional mortgage. FHA home loans have a huge drawback. All borrowers are required to pay mortgage insurance, which can make your mortgage significantly more expensive. The most significant advantages of FHA home loans are: lower credit score requirements and lower down payment requirements.
- Conforming mortgage – The federal government limits the loan amount by geographic area.
- Non-conforming mortgage loan – The major drawback of non-conforming home loans is that they can’t be sold or bought by Freddie Mac or Fannie Mae. The most common non-conforming loans are “jumbo” loans due to their large loan amounts. Non-conforming mortgages usually require a larger down payment of 10 percent to 20 percent, or higher, and have a good credit history.
- VA mortgages – VA home loans are an excellent option for qualified military service members, veterans, and their spouses. If you are eligible for a VA home loan, you can finance 100 percent of the loan amount. That’s right; you don’t have to worry about a hefty downpayment.
- USDA loans – This is an excellent home loan option for lower-income rural area homebuyers with a modest amount of money saved for a down payment.
Is mortgage interest tax-deductible in California?
If you are a homeowner, the state of California, the state allows deductions for your real estate tax. In California, you can deduct home mortgage interest on mortgages up to $1 million. Also, the state allows you to deduct interest for home equity debt up to $100,000. You can use the cash from the home equity loan any way you want, but you may not be able to deduct it.
When is home equity loan interest non-tax-deductible?
If used the home equity loan to pay for anything unrelated to home expense, you cannot deduct the interest. For example, if you used the money from your home equity loan to pay off credit card debt, financing a trip to Paris, or to go on a relaxing vacation to a European spa, the interest won’t be deductible.
How can parents help you with a mortgage?
Your parents can help you with a mortgage in the following ways:
- If your parents have the cash, they can become the lender for your mortgage.
- Your parents can gift you money to help you with your mortgage. They can write a check for any amount they want. Receiving a gift from your parents for a sizable downpayment may help you avoid paying for private mortgage insurance.
- The riskiest option for your parents to help you with a mortgage is co-borrowing. Co-borrowing is an excellent option for borrowers with a limited credit history. Basically, you go through the mortgage application process with your parents. Your parents also have to meet the mortgage lender’s credit requirements. At closing, the parents will sign the loan documents with the children. Co-borrowing may not be an option with all lenders, so shop around if this is the only way for you to buy a house.
Should I get a fixed interest rate or adjustable-rate mortgage?
A fixed-rate is set when you take out the loan and doesn’t change, while an adjustable-rate may change. Often, an adjustable-rate will start lower than a fixed rate, but it may go up after the introductory period. It also varies based on current interest rates.
If you plan on moving within the next few years, you might want to consider an adjustable interest rate mortgage. Your adjustable interest rate mortgage might start out with lower monthly payments. It is a great way to save money each month on your mortgage payments. If you plan on staying in your home for many years, you might look at a fixed-rate mortgage for stability. Contact a mortgage professional and learn more about your loan options.
What is PMI?
PMI stands for private mortgage insurance. Your mortgage company will likely require you to pay for PMI if you make a down payment that is less than 20% of the total purchase price of the home. PMI protects the lender if you stop making payments on your loan.
How much mortgage can I afford?
Do you want to know how much of a mortgage you can afford? Follow the 28/36 rule. The 28/36 rule states that no more than 28% of your gross monthly income goes toward your mortgage, and no more than 36% of it goes toward your total debt loans. Your mortgage payment will consist of the principal and interest, property taxes, homeowner’s insurance, and PMI. Use a free mortgage calculator to determine how much you can afford.
Should I get a 15-year or a 30-year mortgage?
Generally, 15-year mortgages charge lower interest rates. The benefit of a 15-year mortgage is that you will pay off your mortgage in 15-years. That is 15-years faster than paying off a 30-year mortgage. With a 15-year mortgage, you will pay a lot less interest than you would pay on a 30-year mortgage. 15-year mortgages also offer lower interest rates. Consider your needs. A 30-year mortgage might allow you to afford more house, for example.
How much down payment?
It is smart to make a 20% or larger down payment when you buy a house. However, many people make a 10-15% down payment. Some loan programs, like VA, might offer a 0% down payment. If your goal is to pay off your house quickly and have a lower monthly payment, a more substantial down payment is the way to go.
Why is 20% Down Payment A Great Idea?
The world is teeming with rules and advice about how to search for a home, make an offer, and negotiate a good deal. If you want to buy a home and apply for a mortgage, one of the most tried and true rules is the 20% down payment. As a refresher, a down payment is the amount of money you are willing to contribute immediately toward purchasing a home.
There are many moving parts when you are looking to purchase a house and apply for a mortgage. To come up with a 20% down payment can potentially help make the process easier for you. Here are five reasons why a 20% down payment is a great idea.
Improve Your Odds of Qualifying for a Mortgage
The most compelling reason to make a 20% down payment is that it increases the likelihood of qualifying for a mortgage. The larger the down payment, the smaller loan you need. If you buy a house for $200,000, a 20% down payment – $40,000 – it means that you only need to take out a $160,000 mortgage. Although the 20% down payment can improve your chances to qualify for a mortgage, to come up with a substantial down payment can be hard, especially for first-time homebuyers. But it’s worth it if you can do it.
You Could Side Step Private Mortgage Insurance
Another reason for making a 20% down payment is to avoid private mortgage insurance or PMI. PMI is insurance to protect the mortgage company. PMI pays the lender in case the borrower defaults on the mortgage.
If you can’t come up with a 20% down payment, the lender may tack on PMI, which results in higher monthly payments.
Cut Monthly Payment
If you can make the 20% down payment, your payments will be lower than if you made a smaller down payment. If you make a 20% down payment, you will have a smaller mortgage. Thus, you will have lower mortgage payments. The 20% down can make a home more affordable.
Try a free mortgage calculator to determine how a 20% down payment would affect your mortgage payment.
Greater Equity Means Less Interest Paid
Each mortgage payment is a combination of at least two things, the principal and interest. As the mortgage matures, the principal of your payment will increase, and the interest part will decrease. The reason for this is that the interest part of the payment is calculated based on the current outstanding balance of the mortgage.
When you make the 20% down payment, you start your mortgage with a lower balance than you would with a smaller down payment. The result is that you save money because less interest is charged over the lifetime of the home loan. If you can make a sizeable down payment right off the bat, you will be able to pay off your loan quicker, giving interest rates less time to add up.
You can use an amortization calculator to see how much of your mortgage payments are going toward the principle of the loan and how much is going toward interest.
Immediate Equity Infusion
If you can make the 20% down payment, you have just bought yourself instant equity into your new home. Home equity is the amount that you own outright of your home. Equity is often considered a person’s chief source of collateral, so being able to obtain a portion immediately can put you in an advantageous financial position if you ever wanted to refinance or buy a second home.
Another benefit of building home equity is that it can help protect you if the housing market makes a downturn. If you make less than a 20% down payment and the market turns, you could find yourself in a negative equity position.
The reasons outlined here should give you a better understanding of the benefits of making a 20% down payment. A sizable down payment is a smart strategy. Contact a lender to talk about any mortgage or refinance related questions.
What are mortgage points?
Discount points or mortgage points are an extra fee that you pay if you want to lock in a lower interest rate. Homeowners who plan on keeping their home for longer might want to buy points. The lower interest rate will save you money in the long run.
Will I have to pay closing fees?
It is best to check with your lender about closing costs. Closing costs include title insurance, attorney fees, appraisal fees, documentation fees, and pre-paid taxes and insurance. Keep in mind that the closing costs will add several thousand dollars to your loan amount. You might be able to shop around for some of the closing fees.
What’s the difference between pre-qualification and pre-approval?
Pre-qualification can not only save you time, but it can also give you an idea about the size of the mortgage you can afford. Pre-qualification is a simple process, and it might be done over the phone or through email. The lender will ask you to provide a selection of financial information.
With mortgage pre-approval, you will fill out a mortgage application, and your lender will extensively check your financial history. From there, the lender will be able to give you a more specific number and interest rate. Although neither the pre-qualification nor the pre-approval is a loan guarantee, they can be beneficial during your mortgage journey.
What is refinancing, and when should I do it?
Refinancing is when you get a new mortgage to reduce interest rates, lower monthly payments, or get cash out. If you’ve had your current loan for a year or more and notice that refinance rates are lower than your current rate, you might consider refinancing your mortgage. Also, if you have substantial equity and need cash, you might think about a cash-out refinance. Talk to a mortgage professional and learn about your mortgage options.