7/1/2011 7:16 PM ET|
When a spouse's credit is a mess
Underwriting guidelines prevent lenders from making a 'real-life review' of a couple's creditworthiness. Only the lower of the 2 credit scores determines mortgage rates.
Forget "Hey, baby, what's your sign?" For anyone looking to buy a house with a spouse someday, "What's your credit score?" may be a better pickup line.
The lower a person's credit score is, the higher the conventional mortgage loan rate. In the case of couples who apply for a mortgage together, one spouse's stellar score won't make up for the other's lousy one. The lender bases the rates only on the lower of the two credit scores.
"Current underwriting guidelines require that the lender default to the lower score to make a credit risk determination," says Robert McDonald, principal at Mass Mortgage Group in Medford, Mass. With a score-based system, "a real-life review of a couple's credit profile/history is not allowed, thereby possibly disqualifying the couple from obtaining a mortgage."
Rates on 30-year fixed-rate mortgages have bumped along near their historic lows since the start of the Great Recession, but only borrowers with the highest credit scores can reap the benefits of the low rates.
Recommended: Apply alone
Mortgage broker Sonya Pitt recently evaluated the loan application of a couple in which the husband had a FICO credit score of 720, while the wife's score was 680. FICO's credit scale ranges from 300 to 850, and most lenders won't consider lending to anyone with a score below 620 these days. For that couple, the difference between 680 and 720 would have meant a rate of 5.5% instead of 5%, says Pitt, the president of the South Carolina Mortgage Brokers Association and a branch manager at Network Funding.
Pitt recommends that the spouse with the higher credit score apply for the loan alone with one income, even though two incomes on a loan would improve the important debt-to-income ratio. "It is the lowest score of either borrower, whether they're the primary wage earner or not," says Pitt.
Leaving one spouse off the loan also is becoming more common among long-married couples who are in the process of refinancing a home, says Don Frommeyer, the president-elect of the National Association of Mortgage Brokers and a senior vice president at Amtrust Funding, a mortgage brokerage in Carmel, Ind. Frommeyer recently assisted a couple in which the husband had a deal-breaking score of 580, while the wife had a score of 800. "They ended up refinancing in her name only," he says.
While leaving the lower score off the application makes practical sense for a high-scoring spouse with an income to match, "the reaction you usually get from the other spouse is that they feel a little hurt," Frommeyer says.
Brokers can ease the emotional sting of exclusion by explaining that even if one person is left off the loan, both members of the couple are still allowed to sign the title, Pitt says.
In certain states, if couples want to leave one person off the loan, it may make sense to buy the house before they get married.
Massachusetts, Ohio and Kentucky are among the states that adhere to "dower" or "curtesy" laws. A dower is the portion of a deceased husband's property that a widow is legally entitled to use to support herself and their children. A curtesy is the portion entitled to a widower if the couple had children during the marriage.
In those cases, a bank may have trouble when the loan-paying spouse runs into financial difficulties and wants to sell the house, but the other spouse still has rights to the home. However, spouses sign away their inherent dower/curtesy rights if they sign the legal documents associated with the house. Therefore, in states with dower or curtesy laws, some lenders may require both spouses to sign the loan in case of a foreclosure, according to officials at the Quality Title & Abstract Agency in Eatontown, N.J.
"The problem we run into is when you have a couple that's separated, and one of them leaves the state," says Jerry Collyer, a regional vice president of U.S. Capital Financial Services and a former president of the Florida Association of Mortgage Professionals. "By signing the security agreements, they're waiving their rights," Collyer says.
The main problem with only one person signing the loan is that the bank considers only one income, which is a problem if the higher credit score doesn't match the higher income. Debt-to-income ratio is a major consideration in issuing mortgage loans. Couples may be able to persuade lenders to soften on the debt-to-income ratio issue if they have significant savings or by transferring savings from the account of a bad-credit spouse into the account of a good-credit spouse.
"People don't often associate savings with credit, but you can't have one without the other," says Rod Griffin, the director of public education at credit-rating company Experian. "If you don't have savings in place to help you through an economic downturn, lenders will be more concerned about that."
This article was reported by Carmen Nobel for TheStreet.com.
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Why is this all so complicated and dictated - ever try to straighten out a credit mess - horrible - the system could use some revamping - ?? I suppose most of the systems could use some revamping - anyway, three credit reporting companies - all with their own agenda - who made them so powerful anyway??
You are definitely not alone in having your limits dropped by boa. My wife had a card through them and made a purchase that used about 40% of the limit. We were making payments of 3 or 4 times the minimum (I don't like debt) and suddenly they cut her limit in half. Then a few months later she gets a letter that they have to cut it again because she was too close to her limit! She had minimum payments around $38 and we paid $200 a month. Each time we had a cushion of about $1200, they cut her limit by another grand.............telling her it was because she was using too much of her limit! She started at $15,000, her limit was down to $3,500 when I paid the card off and told her just use it for gas once a month.
Bank of America is going under. Buying 'countrywide' and then p.o.ing all their long term customers with that limit cut stupidity has put them in the toilet. They'll be bankrupt or bought out in another year cause of their managements stupidity. But that doesn't help the damage they've done to peoples credit scores.
I had a similar experience with Wells Fargo. I carried a large balance for 2 months after using the card to finance a cross-country move, and using 66% of my allowable credit to do so. When I paid the car off 2-3 months after my cross-country move, they cut my credit limit immediately by 90%... no exaggeration. When I called to contest this adjustment, they informed me that "we are cutting limits across the board for clients who use too much of their credit limit." Nevermind that I carried a balance prior to that of no more than 5-10 % of my limit. It turns out if I had not paid that card off completely, they would not have cut this card limit so drastically. This seems entirely counterintuitive.
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