Buying your first house together is undoubtedly one of the most exciting moments in life, but there can be little surprises that creep up along the way, one of them is finding out that your partner has a less-than-perfect credit rating.
Bad credit rating can be an added source of stress on top of the search for the perfect house, as it can hinder the amount of money you're able to borrow and in some more severe cases, halt the borrowing process altogether.
However, there are a handful of actions you can take to rectify a bad credit score and routes you can navigate together to find a solution.
What is a bad credit mortgage?
A bad credit mortgage is just like a regular mortgage, except they are likely to have higher interest rates and a much lower limit on the amount you’re able to borrow, to counteract the risk the lender will take in borrowing the money. The average deposit for a mortgage taken within a normal credit range is 5-10%, however, for a bad credit mortgage, lenders could ask you to provide a larger deposit of at least 20-25% of the value of the property.
In simple terms, the lower your credit score, the lower your chance of getting approved and the higher the interest rates will be to balance out the risk the lender is taking.
My partner's credit is poor, are we stuck with a bad credit mortgage?
It can be disheartening to hear that you can’t get the mortgage you were hoping for. Maybe you’re not able to borrow the amount you need, the interest rate has doubled, or you need extra cash for a larger deposit, there is a way you can navigate the application process to help increase your chances of getting the mortgage you want.
If your partner’s credit rating is poor but yours is good, it may be an option for you to apply as a single applicant. Logic tells us that it is better to apply for a joint mortgage, as even if one person has a lesser credit rating, surely two incomes are better than one. However, lenders don’t tend to average out your credit scores to make one whole rating, they tend to focus on the lower credit rating, as this can create a risk for their business. In this instance, a joint mortgage application could be denied.
An option in this scenario would be to apply as a single person for the mortgage. If your credit score is good then you could get approved for the mortgage you desire, as well as benefiting from lower repayments and interest rates and a small deposit to pay upfront. If you do proceed with a joint mortgage application, this could result in a much lower borrowed amount, a request to produce a larger deposit and a much higher interest rate which could cost you more over the length of your mortgage than if you were to apply as a single party.
Another important factor is your DTI (debt-to-income ratio). Lenders will look at your DTI, which compares the amount you would need to repay each month to your income and determine your eligibility for the mortgage. If your partner has a high DTI, this could also land you a higher interest rate than if you were to apply alone.
What are my options if my partner has bad credit?
If your partner does have a bad credit score, don’t lose hope just yet, you still may be able to get a mortgage utilising the points below.
- Pay attention to your partner's debt-to-income ratio. If they have a lot of debt but are a high earner, their DTI ratio would be lower, which in turn, could help to overcome their bad credit score.
- Consider making a larger deposit payment. By saving up more money in advance, you reduce the risk for yourselves and for the lender by being able to borrow less.
- Consider an FHA loan. A Federal Housing Administration loan is a loan backed by the government which requires a lower minimum credit score and down payments and makes them particularly popular with first-time buyers.
Work on improving your partner's bad credit score
Another way to improve your chances of being accepted by lenders for a joint mortgage is by improving your partner's credit score. This isn’t a quick fix; it will take time and dedication but here are a few ways you can go about it.
Bill Payments.If your partner has a knack for late bill payments or finds it difficult to keep on top of paying them on time, then consider putting a plan in place to make all future payments on time. Payment history is the most important factor for calculating your credit score, just one missed payment can make a significant dent in your overall rating.
Credit Utilisation Ratio.This refers to the amount of credit available to you and how much you are using. There is a possibility your credit score could drop if the amount of available credit you are using is higher than 30%. It is recommended to keep your utilisation ratio around 10%.
Credit Cards.If you are a responsible credit card user, then it may be beneficial to add your partner as an authorised user to one or more of your credit cards. Not every credit card issuer will support this but if they do, it’s a good way to boost your partner's credit score with a fairly low impact.
Credit Report.Reviewing your partner's credit report is a must to investigate the detail of what is causing the bad credit and to ensure that there are no mistakes that could be bringing their score down.
Speak to a trusted mortgage advisor to find the best options for you
At TaylorMade, we are dedicated, professional, independent mortgage brokers who can offer friendly, helpful advice when you need it most. We understand how disappointing it can feel to be affected by a lower-than-expected credit score, but we are here to help. We are a team of trusted mortgage advisors that can find the best solution for your circumstances as well as offer the best mortgage rates on the market today.
