BILL'S ANSWER
The facts presented in your question confuse me (you mention you "have" a home but are thinking about buying one, and state that you have a good credit rating but a poor credit history). As a result, I will answer your question in generic manner, which may or may not match the facts of your situation.
The ideal mortgage shopper comes to the table with three qualities: 1) Steady income; 2) Good credit score; 3) Low debt-to-income ratio.
Here, you do not mention whether you or your partner have a history of steady income. For the sake of argument, I will assume that you both do. I will make several assumptions about your incomes later in my answer.
Debt-to-income ratio
You mentioned your partner has a good credit history but is carrying a "fair" debt load. This is significant because lenders look to a potential homeowner's debt-to-income (DTI) ratio when considering a loan application.
To determine your DTI, start by computing your total net monthly income. This includes your monthly wages and any overtime, commissions or bonuses that are guaranteed; plus any pension monies or monies that come from alimony or child support, if applicable. If your income varies month-to-month, calculate your monthly average over the past two years. Don’t forget to include any other monies earned, whether from rentals or any other additional income.
To determine your monthly debt obligations, make sure to include all of your credit card bills, any loans, such as automobile, student, or personal and the amount of the new mortgage payment in the loan that you will apply for. Make sure to include your monthly rent payments if you rent. When you are adding up your credit card obligations, use the minimum required monthly payment. Divide your total monthly debt obligations by your total monthly income. This is your total debt-to-income ratio. The lower your DTI, the better. A high DTI can prevent you from getting the loan. It also can be a warning sign that even a loan that you qualify for could be a serious burden to make each month.
Most lenders traditionally will qualify you for the loan with a DTI of 28% to 44% of your monthly income. In other words, if your monthly income is $4,000, the lender would ordinarily want you to pay no more than $1,760 (.44 x $4,000) toward all your debts. Some sub-prime lenders used to allow borrowers to have DTI ratios as high as 55%.
Good credit
A credit report shows your financial history, the different transactions you have made, as well as providing your credit risk score. This score is known as the FICO score, named after Fair, Isaac, & Company, which developed many of the computer scoring models. It can be almost impossible to fully understand why your FICO scores is what it is, but key factors that are weighed in determining your score are: How timely you have paid your bills, how much debt you are carrying, how much of your available credit you are using (the size of the balance compared to the size of the credit line), how many credit cards and loans you have open, how many people have looked at your credit report recently, and if there is any negative information about in the public record area of your report. This area is where a judgment against you would appear as well as items like tax liens filed by the State or Federal Government.
The higher your credit score, the easier it will be for you to qualify for a loan. If you routinely pay your bills late, you will have a lower score, in which case a lender may either reject your loan application altogether or insist on a very large down payment or high interest rate. Because your credit history has such an important effect on the type and amount of mortgage loan you'll be offered, make sure that you check your report regularly. If you find it necessary to clean up your report, you will want to do so before you apply for a mortgage. To learn more about your credit score, see FICO Score Calculation.
Recommendation
If you have little or no debt -- in other words an excellent DTI -- and a fair credit score consider applying for a mortgage alone. This assumes you have the income to afford the mortgage by yourself. By applying alone your partner's poor DTI or credit score is not in the picture. If you have an excellent DTI but a poor credit score, then work on raising your credit score. See the link I mentioned above for tips on boosting your credit score.
If you need to combine your income with your partner's to have a household income sufficient to buy the house of your dreams, consider consolidating or negotiating her debt sooner rather than later. The result will be a short-term drop in her credit score, but once the debt is resolved and she reestablishes her credit history, her score will rebound and your household will be in a stronger financial position to afford a mortgage.
Here is your Plan A. I recommend you download a Uniform Residential Loan Application, complete it for yourself and leave off your partner's information, and start shopping. Get no-cost mortgage quotes from up to four pre-screened lenders from Bills.com. If the mortgages offered you are not attractive, then go to Plan B and work on reducing your partner's debt load.
Once your partner's debt is resolved and credit score improves, download a fresh Uniform Residential Loan Application and reapply for a mortgage.
I hope this information helps you Find. Learn & Save.
Best,
Bill
www.bills.com/
September 29, 2010
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