Should you Include your Spouse on an Application?
14th July 2014
Let’s say that you are looking to purchase a $450,000 home and you make $84,000 a year and have a credit score around 800. Your spouse, on the other hand, has a credit score around 680. You also have about $25,000 of financial assets in your name and no debts. Your spouse has $32,000 and zero debt and both of you plan on residing in the home for about 7 years.
When applying for a mortgage jointly, both of your incomes are combined as well as any financial assets you may have as individuals. When combining both assets and incomes, it strengthens your application thus making it more probable that you’ll qualify for the mortgage you’re wanting.
On the flip side, filing jointly will also require that you combine debt obligations from both parties even though they’re carried in their separate names. However, looking at the above scenario, this would not be an issue but for some people it definitely can be. In addition to combining debt obligations, the lowest credit score will be used when pricing the loan and this would be a problem in this scenario.
When making this decision you need to look at the implications of qualification and pricing as separate matters. In regards to qualification you either qualify or you do not. If the only way to qualify for the loan is, in fact, to apply jointly then it looks like you’ll be doing just that because there’s not much to consider. However if you can qualify on your own you might still decide to file jointly if by doing so, you reduce your cost.
Looking back at our scenario filing singly, with 5 percent down and a credit score of 800 you would qualify for a 30-year fixed-rate loan and a 5/1 adjustable-rate loan. You would not, however, qualify for a 15-year fixed rate loan since the larger payment would bring your debt-to-income ratio to 49.9 percent, which exceeds the maximum ratio of 43 percent.
Filing jointly in this situation would allow you to qualify for all three mortgages which would include the 15-year. This should only be taken into consideration if you want the 15-year which would actually save on interest but would increase your payment.
If you are able to qualify singly or jointly your decision can be based on whichever one results in a lower cost. Your costs are measured over the seven years you expect to be in the house. The costs would be measured over the seven years you would plan on staying in the house. Here’s what the costs are broken down: upfront fees as well as charges, mortgage insurance and monthly payments, and interest loss on upfront and monthly charges, less tax savings and balance reduction. On a 30-year fixed-rate mortgage filed jointly would be $100,499 where as if you filed singly it would be 112,634. The difference in cost on a 15-year fixed-rate mortgage would be about the same.
Filing jointly would save you money in this situation since the second spouse had enough assets in their name to increase the size of the down payment from 5 up to 10 percent. The reduction in cost from having a bigger down payment drowns out the increase in cost from having to use their lower credit score.
A loan officers focus in guiding you through the process will be on whether or not you qualify rather than pricing. If you can only qualify one way, than that is the way you’ll be guided. If you can, however, qualify either way, then you’ll want to use the option with the lower cost.
Filing jointly inevitable means a lower credit score, thus raising the price. This decision should only be made if the spouse with the lower score has enough financial assets to increase the down payment and therefore lower the mortgage cost. Keep in mind though that the increased down payment has to go past a pricing notch point: 5 percent, 10 percent, 15 percent or 20. For example, an increase to 9 percent from 5 would not help but going from 9 to 10 percent would. If you have any questions, would like a quote or to get pre-approval, give me a call and let me know how I can help.
Let us help you get started in the qualification process and click here for our free pre-qualification form.https://www.myprospectmortgage.com/PThompson/prequalify.asp
You can trust in us to get the job done.
Peter Thompson 630-479-6424
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