Can I Buy a Home if My Spouse has Bad Credit?
This is a great question and it comes up quite often. Let’s take a moment and discuss your options, whether you are looking to either purchase a new home or refinance a property you already own.
The simple answer is this: If one spouse wants to purchase a home for both of the spouses to live in as a primary residence, they are able to do so without having the other on the application paperwork.
The rule is, if you are going to use the income of a borrower to qualify, you must also use the credit of that borrower, but you can choose to use neither income or credit.
The potential borrower who’s credit and income you plan on using must be able to support the cost of the home and all associated expenses by themselves.
Are There Any Other Options?
Yes, many programs allow for what is called “Non Occupant Co-Borrowers”.
It is common that the income of the entire household is necessary in order to qualify for a mortgage. When one of the spouses is unable to be on the mortgage due to credit history, you can look to close relatives as an alternative.
A non occupant co-borrower is exactly what it sounds like. It is a borrower who will not occupy the home but has solid income and credit to the extent that they can add value to the mortgage application.
Keep in mind that all mortgage expenses, household debt and consumer debt of this borrower will need to be factored into the application. They will need to have enough income to pay all of their expenses and still have enough verifiable positive cash flow to strengthen your mortgage application.
If you are considering using the credit of another individual to buy a home for you, think again. The process of using a non-occupant co-borrower as mentioned above is fine but, never consider using a relative’s credit to buy a home for you and neither you or your spouse go on the application. This is called “Straw Buying” and it is fraud.
Legal Ownership of the Property
There can be situations where one spouse would want to have just their income and credit used, but the other could still be on title, meaning that they would still have a legal interest in the property.
There is a document called a “quitclaim deed” that either your attorney, or often a title company can prepare that allows one spouse to waive all rights and interests that they have in a property and subsequently release the ownership rights to the property.
Keep in mind that most mortgages have a clause called “Due on Sale”. A due on sale clause is common language within the provisions of a mortgage contract. The language basically states that any change in title, be it additions or subtractions, the entire mortgage balance can be immediately due.
In many states there are what are called homestead laws where spouses have inherent rights to property that their spouses own, even if they want no documented legal interest in the property.
Keep in mind that if at some point that the owning spouse wanted to have the other added back to the title of the property, all they would have to do is to have another quitclaim deed prepared to reinstate ownership to that party.
Also note that while a quitclaim deed will remove (or add) a party from title, the only way to remove a party from the mortgage obligation is to refinance the mortgage with only the one qualified borrower. “Quit claiming” one spouse off the title does not release their mortgage obligation.
There are potential risks to releasing your property rights. If the spouse that waived their rights to ownership to the property wanted to have those rights restored, but the spouse that has the rights didn't want this to happen, you could get left out in the cold.
There is little recourse for the spouse wanting to be added back on the title. Make sure you talk to your attorney before entering into any type of transaction where you either sign away your rights, or grant your property rights to another.
As always, consult your attorney.