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When a Co-Borrower Has Poor Credit

In most cases it is easier to qualify for a home mortgage by applying with another person — be it a spouse or partner, or even a close friend or sibling. But problems may arise if the other person’s credit score is less than stellar.

The federal agencies that oversee and buy mortgages from lenders, like Fannie Mae and Freddie Mac, require lenders making conventional loans to focus on the lower of the two FICO scores. (Scores generally range from 300 to 850, with the national median at 711, according to FICO.)

But both scores may be factored into other loans. On a jumbo loan, for instance, the lender is likely to “put more weight on the credit score of the person with the higher income,” said Greg Gwizdz, an executive vice president of Wells Fargo Home Mortgage in Somerville, N.J.

For some people, however, it may be necessary to hold off on a home purchase for a few months to allow the co-borrower with credit issues to clean up his or her report and raise the score.
This can be done by being “hypervigilant on paying your bills on time” for a few months, said Tracy Becker, the president of North Shore Advisory, a credit restoration company in Tarrytown, N.Y., or by perusing the credit report and correcting any inaccuracies.

Ms. Becker says that one way to raise a FICO score by 30 to 40 points in a few months is to be added as an authorized user to a well-established person’s credit card, even if you don’t use the card. Your score can rise, too, if you pay down credit-card balances so they are at least 10 percent of the maximum credit limit.

Even if you cannot afford to pay down the cards that far, it can help even to reduce the balance to, say, 60 percent of the limit, said Joanne Gaskin, the director of product management global scoring at FICO. The closer your balance is to the credit limit, the more the score will increase when the balance is paid down.
If the cards are “maxed out,” Ms. Gaskin said, “that’s going to be very negative.”

Preparation is key, Ms. Becker said, suggesting that both parties review their credit reports and scores together early on in the home-search process.

Alexander Arader, the owner of Arader & Associates, a mortgage broker in Stamford, Conn., said that a borrower with a credit score of 620 to 640 could pay as much as one percentage point more in interest than a borrower with good credit, say around 760 or higher.  “Do whatever it takes to get your credit score up,” he said.

If there is little time for a significant upgrade in a credit score — perhaps because you found your dream home and can’t wait to make an offer — borrowers should explain to the lender any issues that might have affected the credit report, said Mr. Gwizdz of Wells Fargo.

“Take time to tell your story,” he said, and make sure you carefully document any major life issues that might have contributed to a score’s decline, like an illness, divorce or job loss.

The borrowers also need to make it clear why a second person is on the mortgage, especially if that person is not living in the house, he said. A parent helping a child buy his first apartment in Manhattan will have less trouble explaining the connection than a friend who isn’t there full-time, he said.

Sometimes it may make more sense to have just one person on the mortgage — provided, of course, that the person can afford the monthly payments alone. Some banks may allow two people to appear on the property’s deed with only one on the mortgage note.

While the FICO credit score is important, it is only one part of what lenders evaluate in the application process, Mr. Gwizdz noted.

Among other factors that underwriters examine: the size and source of the down payment (many are now requiring 20 percent); both applicants’ incomes and whether they have been rising; their debt-to-income ratios; and the property they are buying.