Finding the perfect partner and working together on financial goals like: B. Buying your dream home is a goal many of us have. But when you finally meet the right person and it’s time to start house hunting and get that mortgage pre-approval letter, many of us assume both names should be on the loan application.
But according to Matthew Locke, national director of mortgage sales at UMB Bank (talk with GoBankingRates), there are a number of scenarios where it makes more sense for someone to do this to exclude your partner from a mortgage loan application.
Reasons not to take out a joint mortgage
While some might assume that giving up on a mortgage may indicate a partner, this is by no means always the case. There are four solid reasons Locke addressed.
1. One of you has a bad credit history
The creditworthiness of both applicants is factored into the mortgage interest rate. If either of you has a significant history of late payments, this could result in a much higher monthly payment due to a higher interest rate.
2. One of you has a big debt
Your front-end and back-end debt-to-income ratio (DTI) is critical to getting a mortgage approved. The front-end report shows what percentage of your income would go towards your housing expenses (mortgage, insurance, property taxes). The backend report shows how much of your income is needed to cover all of your monthly debts.
Ideal front-end ratios are around 28% or lower, although some lenders will approve an application at up to 45% ratio. On the backend, the ideal ratio is 36% or less.
If one of you has a large debt load, it could make your debt-to-income ratio too high to warrant a mortgage. That debt load could also be pushing your DTI too close to the limit, triggering a higher interest rate.
3. One of you has a lower credit rating
A bad credit history and/or a large amount of debt will likely result in a low credit score. It’s a bad idea to include a partner with a low credit rating in a mortgage application because the interest rate that mortgage applicants qualify for will default to this lower rating. That higher interest rate could cost you thousands over the life of the loan.
4. One of you has little or no income
Excluding a partner with little or no income from a mortgage application can also be beneficial. This strategy makes it easier to qualify for a down payment help program and could end up saving you some money.
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If one of the partners is self-employed, you may want to omit it from the application as self-employed people require more complicated documentation. Just one more thing to keep in mind.
Even if you don’t have a mortgage, you can still own the house
The thought of not being listed as a borrower on your home’s mortgage can certainly provoke an emotional response, but that doesn’t mean you don’t own your home as much as your partner.
Suggest Editor-in-Chief Kristen Philipkoski bought a home with her husband in 2021. She was self-employed at the time, and her mortgage broker recommended including only her husband in the mortgage.
He still has the title with him, so he owns the house regardless of who technically owes the bank any money.
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“I felt offended at first, but then I realized that I kind of have the best of both worlds. I’m not responsible for the mortgage, but I still own the house,” she said.
We should note that the ability to do this varies from state to state, so this won’t always be an option.
If putting both people on the mortgage is a good idea
In a perfect world, both partners would have a mortgage. It’s the way to go if you both have high incomes and good credit.
That way, you’re likely to get a larger mortgage amount at a reasonable interest rate, since your combined income and assets are taken into account. It’s an easier and better way to make buying your dream home a reality.
