Mortgage Application when One Partner Defaulted on Student Loans
March 18, 2021 12:23 PM Subscribe
My wife and I are starting to think about buying a house. However, I defaulted on my student loans, and I'm concerned how that will affect our application. I've googled it, but I find finance stuff kind of hard to understand (see above, defaulting on loans), and a lot of mortgage and/or student loan-related advice sites look and feel pretty scammy to me. I'm looking for more personal advice about how to handle our situation.
From what I can tell, we have two options: to apply for a mortgage jointly, or for her to apply in her name only. The first would seem to preclude us from FHA loans and would probably hurt our chances in general. The second would seem to limit the size of the loan, since it would only take her income into account. Which option would be better? Is there a third option I'm not aware of, which would take my income into account but not my credit?
Otherwise, my credit is not great. On the low side, around 630. I think this is partially due to the fact that there isn't much to affect my credit score. I don't have a credit card, and I paid off my car loan last year (early!). Most of our utility bills are in her name, for unrelated reasons (I pay daycare, health insurance, and car/renter's insurance, and we each handle our own loans/car payments/etc. and both buy groceries, so we're splitting bills pretty evenly, but checks to daycare don't show up on credit reports). Her credit is excellent, over 750, and her salary is higher than mine by about 30%, so she'd be the more attractive solo applicant regardless of credit. We're saving a fair amount for a down payment (mostly her, but I'm doing a bit), but probably not 20% like the rule of thumb. I'm also inheriting some money from an aunt that we'll probably put toward it. Our finances are otherwise separate. We're both credit union members, and this would be our first house, so we'd potentially be eligible for first-time homebuyer programs.
If she applies solo, we're also a little concerned about what would happen if we got divorced. She worries about what would happen if my name weren't on the mortgage and I left - she would be stuck, right? Meanwhile, I worry about what would happen to me if she left. She theoretically wouldn't need me to sell the place, so even if she was the one who left me, she could sell the place? And what would happen to the money I inherited from my aunt if she sells without my permission? Am I just out of luck? I'm sure other people have had these questions before, so there have to be solutions out there.
Personal experiences welcome, but also links if you have them. The easier to understand, the better. I generally understand the process to get my loans out of default, so I'm not really worried about that at this point, just focused on the mortgage application question.
From what I can tell, we have two options: to apply for a mortgage jointly, or for her to apply in her name only. The first would seem to preclude us from FHA loans and would probably hurt our chances in general. The second would seem to limit the size of the loan, since it would only take her income into account. Which option would be better? Is there a third option I'm not aware of, which would take my income into account but not my credit?
Otherwise, my credit is not great. On the low side, around 630. I think this is partially due to the fact that there isn't much to affect my credit score. I don't have a credit card, and I paid off my car loan last year (early!). Most of our utility bills are in her name, for unrelated reasons (I pay daycare, health insurance, and car/renter's insurance, and we each handle our own loans/car payments/etc. and both buy groceries, so we're splitting bills pretty evenly, but checks to daycare don't show up on credit reports). Her credit is excellent, over 750, and her salary is higher than mine by about 30%, so she'd be the more attractive solo applicant regardless of credit. We're saving a fair amount for a down payment (mostly her, but I'm doing a bit), but probably not 20% like the rule of thumb. I'm also inheriting some money from an aunt that we'll probably put toward it. Our finances are otherwise separate. We're both credit union members, and this would be our first house, so we'd potentially be eligible for first-time homebuyer programs.
If she applies solo, we're also a little concerned about what would happen if we got divorced. She worries about what would happen if my name weren't on the mortgage and I left - she would be stuck, right? Meanwhile, I worry about what would happen to me if she left. She theoretically wouldn't need me to sell the place, so even if she was the one who left me, she could sell the place? And what would happen to the money I inherited from my aunt if she sells without my permission? Am I just out of luck? I'm sure other people have had these questions before, so there have to be solutions out there.
Personal experiences welcome, but also links if you have them. The easier to understand, the better. I generally understand the process to get my loans out of default, so I'm not really worried about that at this point, just focused on the mortgage application question.
Well, the lower limit to the size of the loan only matters if you need the extra money.
Also, and this is a little counterintuitive, even if you only use your wife's income to *qualify* for the mortgage, you can probably both be listed on the mortgage (and deed). Think of it from the bank's perspective: they think you are a bad risk for repaying the loan, BUT if your wife defaulted on the loan (which they think is unlikely), if you are also on the loan then they would be able to go after you as well, which is good for the bank. Basically your wife probably won't and shouldn't buy the house so that it's only in her name. The last two times I refinanced my mortgage we only used my income, not my husband's, on the mortgage, because there was a chance his income might go away before we could sign the paperwork. He was still on the mortgage and the deed.
I would strongly recommend taking a first-time homebuyer's course if it's available to you, and also talk to a mortgage broker. They can run the numbers for you both ways and you can start to make a decision based on specific facts rather than generalities.
posted by mskyle at 12:36 PM on March 18, 2021 [2 favorites]
Also, and this is a little counterintuitive, even if you only use your wife's income to *qualify* for the mortgage, you can probably both be listed on the mortgage (and deed). Think of it from the bank's perspective: they think you are a bad risk for repaying the loan, BUT if your wife defaulted on the loan (which they think is unlikely), if you are also on the loan then they would be able to go after you as well, which is good for the bank. Basically your wife probably won't and shouldn't buy the house so that it's only in her name. The last two times I refinanced my mortgage we only used my income, not my husband's, on the mortgage, because there was a chance his income might go away before we could sign the paperwork. He was still on the mortgage and the deed.
I would strongly recommend taking a first-time homebuyer's course if it's available to you, and also talk to a mortgage broker. They can run the numbers for you both ways and you can start to make a decision based on specific facts rather than generalities.
posted by mskyle at 12:36 PM on March 18, 2021 [2 favorites]
Get in touch with your credit union, as it's a good resource for financial matters. (Speaking with someone there does not obligate you to get your eventual mortgage through the union.) The credit union may even offer a first-time homebuyer course. Yes, documents should list you both as owners of the house. Here are a couple of general links about inheritances and house-buying; if you want to contact the moderation team with your state of residence, you may get more location-specific advice.
posted by Iris Gambol at 12:47 PM on March 18, 2021
posted by Iris Gambol at 12:47 PM on March 18, 2021
There’s no way I’m aware of to use a borrower’s income without evaluating their credit, but based on the details provided you should have several options.
A 630 credit score is well in the range of acceptable for FHA. The defaulted student loans will likely be a problem though, if they were federal loans. Defaulted federal debt will make you ineligible for FHA, so you’d need to get those into a payment plan.
Your wife’s score would likely qualify for a conventional (Fannie Mae) loan, which could be less expensive, so if you can get enough loan for your purchase on her income only, it’s worth looking into. As noted above, you can be on the deed to the house without being on the mortgage.
Agree that a good mortgage broker would be the starting point; they can find all the available options for you. If you do go through your credit union, ask what loan programs they have available; CUs and smaller banks may not offer FHA .
posted by tinymojo at 1:13 PM on March 18, 2021 [1 favorite]
A 630 credit score is well in the range of acceptable for FHA. The defaulted student loans will likely be a problem though, if they were federal loans. Defaulted federal debt will make you ineligible for FHA, so you’d need to get those into a payment plan.
Your wife’s score would likely qualify for a conventional (Fannie Mae) loan, which could be less expensive, so if you can get enough loan for your purchase on her income only, it’s worth looking into. As noted above, you can be on the deed to the house without being on the mortgage.
Agree that a good mortgage broker would be the starting point; they can find all the available options for you. If you do go through your credit union, ask what loan programs they have available; CUs and smaller banks may not offer FHA .
posted by tinymojo at 1:13 PM on March 18, 2021 [1 favorite]
Agree with everything mskyle says. Banks have really laughable ideas about how much mortgage a person can handle. You might be able to get plenty of money with just your wife on the application. Because the interest is partially based on your credit score it would be good to have the strongest applicant be listed. You don't want to pay more interest because you have a lesser credit score.
You can definitely have your name also listed on mortgage and deed of the house afterwards.
posted by MadMadam at 1:19 PM on March 18, 2021 [1 favorite]
You can definitely have your name also listed on mortgage and deed of the house afterwards.
posted by MadMadam at 1:19 PM on March 18, 2021 [1 favorite]
You don’t say, but you talk about FHA and student loans, so I’m going to assume that you’re in the United States. A lot of this is really state dependent: many states have programs for first-time homebuyers that are very loosey-goosey on credit and/or down payments.
Also, community property laws vary depending on the state. An example: we live in North Carolina. I owned a home previously that I was selling to my male ex (we had not been married, which greatly simplified things). However, my wife had to sign off on her “interest” in the home; it turns out it was marital property, and we had no idea, because I had bought the house long before we got married. So even if you are not on the deed (tho you should be able to quitclaim in), it may still be marital property in the case of a divorce.
basically: this stuff is super state dependent. See if you can find a loan officer you trust (ask friends and family who have recently bought homes who they worked with and if they were happy). Trust me, you can’t tell the officer anything they haven’t heard already and they shouldn’t be judgemental (if they are, then you need another loan officer and another bank probably). but this is one of those cases where a local loan officer and a local real estate lawyer are going to be a better resource for you.
posted by joycehealy at 1:26 PM on March 18, 2021
Also, community property laws vary depending on the state. An example: we live in North Carolina. I owned a home previously that I was selling to my male ex (we had not been married, which greatly simplified things). However, my wife had to sign off on her “interest” in the home; it turns out it was marital property, and we had no idea, because I had bought the house long before we got married. So even if you are not on the deed (tho you should be able to quitclaim in), it may still be marital property in the case of a divorce.
basically: this stuff is super state dependent. See if you can find a loan officer you trust (ask friends and family who have recently bought homes who they worked with and if they were happy). Trust me, you can’t tell the officer anything they haven’t heard already and they shouldn’t be judgemental (if they are, then you need another loan officer and another bank probably). but this is one of those cases where a local loan officer and a local real estate lawyer are going to be a better resource for you.
posted by joycehealy at 1:26 PM on March 18, 2021
Also for first time buyer programs, check out your state housing finance authority. These agencies may have down payment assistance or other benefits available, and typically will require homebuyer education. Any lender approved to offer this product should have a good range of options for your situation.
posted by tinymojo at 1:31 PM on March 18, 2021
posted by tinymojo at 1:31 PM on March 18, 2021
A small point of anecdata: I changed my name before applying to buy a house and despite having the same SSN, I had zero credit when it came time to do the house-buying credit check. Literally zero. We ended up buying the house in just my spouse's name and it was fine.
posted by The demon that lives in the air at 8:27 PM on March 18, 2021
posted by The demon that lives in the air at 8:27 PM on March 18, 2021
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posted by aniola at 12:33 PM on March 18, 2021 [4 favorites]