Buying A Home When Your Partner Has Bad Credit? Protect Yourself With These Expert Tips
When buying a home, it's important to do your research, like, for instance, reading up on popular myths about buying a home or the things first-time homebuyers always get wrong about the process. In addition to researching things like neighborhood, house size, and, of course, price, it also requires research into your own finances. For couples, this means learning about each other's credit, if not already known. Securing financing happens early on in the homebuying process, and the state of your credit will determine what kind of loan you qualify for. If one of you has poor credit, then you'll need to be prepared to work with the lender on a solution, or one of you may need to apply for the mortgage alone.
Speaking with Jason Tartick, a bestselling author, finance expert, and podcast host, we asked him about how to approach making large purchases, such as buying a home, if one partner has stronger credit. According to Tartick, clarity is key, and it starts with a conversation, explaining that "being open about your finances and coming up with a plan of action together is the best way to ensure a healthy, lasting relationship." As for a mortgage, specifically, Tartick says that if the goal is to have both your names on the mortgage (and the deed), then you will need to first work on improving the credit of the person who needs it. This is one way to protect yourself from any surprises down the road.
Who's name is on the deed?
Something first-time homebuyers may not realize is that a person's name can be on a deed and not the mortgage. This is because a home's mortgage is separate from a property's deed. The deed shows legal ownership of a property, whereas a mortgage shows who's responsible for paying off the loan balance.
While this is one way to get around a partner with bad credit, Jason Tartick cautions against it. He says that, to protect yourself, the name on the mortgage and the deed should be the same. In his new book, "Talk Money to Me," Tartick says there's an example of this very scenario, where a borrower with good credit secured a mortgage for themselves and their partner — and added them both to the deed — only to have the IRS come after them both and their property due to owed back taxes by the partner with credit issues. Because both their names were on the deed, this allowed the IRS to levy the property, too.
One thing to consider also is that you can always add your partner's name to the deed in the future. To add a person's name to a property deed at a later point, you'll simply need to draw up a new deed to transfer ownership. This type of transfer is one where a quitclaim deed will work.
Improve your partner's credit first
Buying a home is, for most of us, the biggest purchase we'll ever make, and most likely with the longest commitment of 15 to 30 years. The average length of a first marriage that ends up in divorce, meanwhile, is 8.2 years. So, while it might be awkward to think about an inevitable future break up, it's also important to understand what the future consequences may be when securing a mortgage yourself (as a workaround to your partner's bad credit today) and adding your partner to the deed.
As Jason Tartick notes, though, another way to protect yourself when it comes to a large purchase like buying a home is to wait and help your partner first. If you're not in a hurry to buy a home (and you've now shared your credit report with your partner), then you can take this time to help improve your partner's credit. Then, down the road, when you're ready to buy a home together, both of you can be on the mortgage.
Note, according to FICO, prime credit scores fall between 660 and 719; and, typically, to secure financing, you will need a score of 620 or higher. So, this gives you an idea of how close or how far you and your partner may be right now to house hunting once again. (Check out Money Digest's roundup of 12 simple tricks to improve your credit score.)