You've decided to co-apply for a mortgage loan, whether with your spouse or with a friend or other family member. Unfortunately, your credit is lower than it should be thanks to high credit-card debt and several late car-loan payments. Though you might prefer that lenders ignore your past financial behavior, they will run your credit if you sign onto an application for a mortgage loan as a co-applicant.
TL;DR (Too Long; Didn't Read)
If you're a mortgage co-applicant, a lender will pull your credit report as well as the primary borrower's credit report. But you may be listed as a co-owner instead of a co-applicant on a home loan without your credit score's being considered, as long as the primary borrower's credit score qualifies for the mortgage.
Importance of Credit Scores
Mortgage lenders today rely heavily on the three-digit credit scores of borrowers. That's because these numbers provide a quick snapshot of how well loan applicants have managed their credit.
Borrowers who have missed several car payments, often pay their credit-card bills late or have run up large amounts of credit card debt will generally have lower credit scores. Those who have a history of paying their bills on time and don't have much revolving debt will boast higher credit scores. Lenders view borrowers with high credit scores as being more likely to pay their mortgage payments on time each month.
Co-Applicant Role in Mortgage
Sometimes more than one borrower applies for a mortgage loan. This often occurs with married couples who are buying a home together. Other times unrelated buyers might want to purchase a residence together, or family members -- such as a brother or sister -- might want to pool their financial resources to buy a condominium or single-family home. The benefit of this is that it allows lenders to consider both applicants' sources of income, something that can allow borrowers to purchase a more expensive residence.
Co-Applicant Credit Challenges
Having more than one applicant, though, can also come with problems. Lenders will run the credit of however many applicants are on a mortgage-loan application. This is fine if both applicants have strong credit scores. But if a co-applicant has a particularly weak score, lenders might reject the loan application for fear that the borrowers will miss loan payments or default on the mortgage loan completely.
Solving Co-Applicant Credit Issues
One solution is to rely just on the applicant with a strong credit score. This will work if that particular applicant has a strong enough gross monthly income to cover the monthly mortgage payments that would come with a particular home. If a single applicant's income isn't high enough, borrowers will either have to find a less costly home that comes with a lower mortgage payment or hope that the financially healthy applicant's credit score is so high that it will overwhelm the lower credit score of the applicant with the more shaky financial history in the eyes of a mortgage lender.
It is possible for a spouse – or other home-buying partner – with bad credit to be listed as a co-owner on a house without being a co-applicant, or co-borrower, on a loan. This way, even though the spouse or partner's income and credit score aren't being used in the mortgage application, they can still be listed on the home's title.
Don Rafner has been writing professionally since 1992, with work published in "The Washington Post," "Chicago Tribune," "Phoenix Magazine" and several trade magazines. He is also the managing editor of "Midwest Real Estate News." He specializes in writing about mortgage lending, personal finance, business and real-estate topics. He holds a Bachelor of Arts in journalism from the University of Illinois.