Do Both Spouses Need to be on a Mortgage? No! Pros & Cons of One Spouse on a Mortgage
Many couples shopping for a home assume both spouses must apply for the mortgage. Not true! There are three benefits to a couple apply for a joint loan, and five reasons and situations when one spouse should apply for a mortgage by themselves.
A joint mortgage is a home loan with two or more borrowers who are responsible for repaying the loan. A joint mortgage is common for married couples, but a joint mortgage can involve two or more friends, family members, investors, or others. People sharing a joint mortgage almost always have what the law calls “joint and several” liability for repaying the loan. This means everyone who signs the loan is 100% responsible for repaying the loan, even if one of the other signers dies or otherwise stops making their share of the loan payments.
Three Reasons For Joint Mortgages
Joint mortgages are necessary in some circumstances, and can provide some emotional comfort to people who want to feel connected to their home.
Applying jointly allows the borrowers to combine their income to qualify for a loan of the size needed to buy the home. The lender looks at the income from each applicant when pondering the go/no-go decision on the loan application. If both borrowers have consistent income over a 2-year period, this increases the likelihood of approval and allowing borrowers to receive an approval on a larger loan than one borrower would alone.
A joint mortgage may be necessary in a situation where one borrower has an otherwise strong application and would otherwise qualify for a loan, but is burdened with significant debt. Lenders look closely at the ratio of the borrower’s debt-to-income (DTI). If a lone borrower’s DTI is too high, adding a second borrower may alter their combined DTI. Of course, this assumes the additional borrower’s DTI ratio is low. Otherwise, combining the incomes of two or people with high DTIs may not result in an approval.
|Traditional FICO Score Classes|
|Alt-A||620 to 659|
|FHA Credit Score Classes|
|10% down||500 to 579|
|FICO scores range from 300 to 850|
Combined Credit Scores
Each lender has its own standards for classifying applicants. See the table “Traditional FICO Score Classes” to learn how lenders and the FHA classify applicant credit scores.
Underwriting standards vary, and adding a joint borrower can help or hurt an application depending on each borrower’s circumstances. Fannie Mae buys many home loans from loan originators. According to Fannie Mae’s selling guide, when there are multiple borrowers, the lender must learn the FICO score for each individual borrower and select the lowest applicable score from the group as the representative credit score for the mortgage. This means a person with a low score brings the entire group down.
However, if one (or more) of the applicant’s have no credit score, the group-score is the score of the borrower with the credit score. This means a person with little income but a terrific credit score can buy a home with a person who has great income but no credit history.
Some married people argue they feel secure when both spouses are on the mortgage. There is a basis for this argument in law. Should one spouse die, the surviving spouse can continue to pay the mortgage and stay in the property without qualifying for a new loan.
Five Reasons For One Spouse On a Mortgage
There are five reasons why married couples may not want to apply for a joint mortgage.
Credit Score Implications
Depending on the lender’s underwriting rules, a person with a low credit score can lower the collective credit score for the application. If one spouse has a subprime credit score, and the other spouse otherwise qualifies for a home loan, then it would be counter-productive to apply for a joint loan.
Documenting one’s creditworthiness takes time for the borrower to assemble, and time for the lender to review. Documenting a self-employed borrower is especially time-consuming. If an otherwise unnecessary borrower has self-employment income, reconsider a joint application.
Qualifying for Future Loans
No one knows what the future holds. If the married couple later decide to buy a vacation or investment property, and only one spouse is on an existing loan, the debt-free spouse is free to apply for a loan. This may make qualifying simpler and take less time, as mentioned above. Also, the spouse without a loan may be qualified for first-time homebuyer programs.
Disasters: Financial & Personal
Few people sign a home loan expecting to default. However, if the events following the housing crash and recession have taught us anything, it is no one knows for certain if their job is 100% secure, and there are no guarantees home prices will always rise. Should a household face foreclosure or short sale, the spouse with the mortgage will carry the credit score damage. The couple can focus on keeping the undamaged spouse's accounts current. Should the spouse with the foreclosure need to file for bankruptcy, the other spouse will be untouched by these events.
No one plans for a divorce while shopping for a loan, but keep these two facts in mind: About half of all marriages end in divorce. And, one spouse usually wants the marital home upon divorce. If both spouses are on the loan and there is a divorce, there is a 100% chance the spouse staying in the home will need to refinance the mortgage. However, if one spouse is on the mortgage and the couple splits, there is a 50% chance the spouse on the loan will stay in the home.
Should the spouse on the loan die, and the surviving spouse continues to make the loan payments, the lender is not allowed to foreclose by invoking the due-on-sale clause of the loan (the Garn St. Germain Act at 12 USC § 1701j–3). This means if the decedent had life insurance, or if the surviving spouse has enough income the surviving spouse will not be thrown out when the lender learns of the borrower’s death.
A Mortgage Is Not the Same as Ownership
It is common during the loan closing for the borrower to sign a dozen documents. One is a deed that establishes the new name on the property’s title. The title establishes who has ownership rights to the property. The title is filed with the county recorder and states who has ownership rights to the property. Whenever someone buys a house, the title is recorded at the same time the loan closes, and it is common for the name(s) on both the loan and the title to be the same. However, the names on both documents can be different. Therefore, where one spouse qualifies for a mortgage, the couple has the option of putting both spouses on the title.
As a practical matter in community property states like California, when spouses buy property during their marriage, courts assume both own the asset regardless of which spouses names appear on the title.
In some states, such as California, Nevada, and Wisconsin, the lender will require the spouse who is not on the loan to sign a one-page document indicating they understand the other spouse is about to enter into a home loan. The document may contain language indicating they waive certain rights if there is a foreclosure.
If you are in a relationship where one spouse qualifies for mortgage alone, consider the advantages of leaving the other spouse free from the mortgage. However, if one spouse does not qualify alone and both qualify with a joint mortgage, you have no choice but to include both in the loan application.