Joint mortgages: what happens if one applicant's credit is weak

It’s a common scenario: you and your partner, family member, or even a friend are excited to buy a home together. You’ve pooled your resources, dreamt about your new space, and you’re ready to take the plunge into homeownership. But then, a question arises: what happens if one of you has a credit score that isn't quite as strong as the other's? This is a really important consideration for joint mortgage applications, and it's something I help clients navigate all the time.

Many people assume that lenders simply "average out" your credit scores, or that the stronger score will somehow magically cancel out the weaker one. Unfortunately, it's not quite that straightforward. While lenders definitely look at your combined income, they typically assess credit differently. They're looking for a clear picture of risk, and a lower credit score can raise a red flag, even if the other applicant has excellent credit.

How Lenders View Joint Applications

When you apply for a mortgage with another person, lenders are essentially evaluating the financial health and risk profile of both applicants. They want to be confident that the mortgage payments will be made consistently and on time. Here’s a breakdown of how they generally approach it:

Firstly, they will look at your combined income. This is often where a joint application shines, as two incomes can qualify you for a larger mortgage than one alone. This is particularly helpful in markets like Metro Vancouver, where property prices are high. However, while your incomes are blended, your credit scores are usually not.

Instead of averaging, many lenders will consider the lowest credit score among the applicants as the primary indicator of credit risk. This isn't always a hard and fast rule for every single lender, but it's a very common practice. Think of it this way: if one person has a history of missed payments or high debt, the lender sees that as a potential vulnerability for the entire mortgage, regardless of how stellar the other applicant's credit is. This is because all borrowers on the mortgage are jointly and severally liable for the debt, meaning each person is individually responsible for the entire mortgage amount, not just their share.

The Impact of a Weaker Credit Score

A lower credit score can have several implications for your joint mortgage application:

• Higher Interest Rates: If the lender perceives a higher risk due to one applicant's credit, they might offer a mortgage with a higher interest rate. This can translate to hundreds, or even thousands, of dollars more in interest paid over the life of your mortgage.
• Reduced Borrowing Power: The amount you can borrow might be lower than you anticipated, even with a strong combined income. Lenders use various ratios, like your Gross Debt Service (GDS) and Total Debt Service (TDS), to determine affordability. A weaker credit score can tighten these ratios.
• Limited Lender Options: Some lenders have stricter credit score requirements than others. A lower score might disqualify you from certain lenders, limiting your options and potentially pushing you towards lenders with less favourable terms.
• Mortgage Default Insurance (CMHC, Sagen, Canada Guaranty): If your down payment is less than 20% of the home's purchase price, you'll need mortgage default insurance. These insurers also have credit score requirements, and a weaker score could impact your eligibility or the premium you pay.

Strategies to Strengthen Your Application

So, what can you do if one applicant's credit isn't ideal? Don't despair – there are definitely strategies we can explore:

1. Improve the Weaker Credit Score: This is often the most impactful long-term solution. Here are some key steps:

   • Pay Bills on Time: Payment history is the biggest factor in your credit score. Set up reminders or automatic payments.
   • Reduce Debt: Especially high-interest debt like credit cards. Aim to keep your credit utilization (the amount of credit you're using compared to your total available credit) below 30%.
   • Check for Errors: Obtain a copy of your credit report from Equifax and TransUnion and dispute any inaccuracies.
   • Avoid New Credit: Don't open new credit accounts or make large purchases on credit just before applying for a mortgage.
   • Keep Old Accounts Open: A longer credit history is generally better.

2. Increase Your Down Payment: A larger down payment reduces the amount you need to borrow, which can make your application more attractive to lenders. It also reduces your loan-to-value (LTV) ratio, which can sometimes offset other perceived risks.

3. Consider a Co-Signer (with caution): A co-signer with excellent credit can strengthen your application. However, this is a significant commitment for the co-signer, as they become equally responsible for the mortgage debt. This is a big decision and should be discussed thoroughly with all parties involved.

4. Explore Different Lenders: As a mortgage broker, I have access to a wide range of lenders, including those who might be more flexible with credit requirements or who specialize in certain situations. Some lenders might weigh different aspects of your financial profile more heavily than others.

5. Address the Root Cause: If there's a reason for the weaker credit score (e.g., a past job loss, medical emergency), being transparent and explaining the situation to me can sometimes help. Lenders may consider extenuating circumstances, especially if you can demonstrate that the issue has been resolved and you're now in a stable financial position.

The Mortgage Stress Test and Joint Applications

BC Specifics: Property Transfer Tax

In British Columbia, when you purchase a property, you'll also encounter the Property Transfer Tax (PTT). This tax is calculated on the fair market value of the property. For a joint mortgage, the PTT applies to the entire property value, regardless of individual credit scores. There are some exemptions, such as for eligible first-time homebuyers or newly built homes, but these exemptions are based on the property value and the eligibility of all purchasers, not just credit.

FAQ

Q: Will my partner's bad credit stop me from getting a mortgage entirely? A: Not necessarily, but it can make the process more challenging and potentially lead to less favourable terms. It's crucial to address the weaker credit score or explore strategies to mitigate its impact.

Q: How long does it take to improve a credit score? A: Significant improvements can often be seen within 6 to 12 months with consistent effort, such as paying bills on time and reducing debt. More serious issues might take longer.

Q: Should we wait to apply until the weaker credit score is improved? A: This depends on your individual circumstances and urgency. If you're not in a rush, taking time to improve credit can save you a lot of money in the long run. However, if market conditions are favourable or you have other pressing reasons to buy, we can explore options available now.

Navigating the world of joint mortgages with varying credit scores can feel complex, but it doesn't have to be overwhelming. My role is to help you understand your options, strengthen your application, and find the best mortgage solution for your unique situation. Don't let uncertainty hold you back from your homeownership dreams.

Ready to see what your options look for? Take the first step with my free 2-minute free intake for me to review. Visit free intake for me to review or give me a call at 778-222-7109.

Related mortgage resources

• Explore my free intake for me to review to see where you stand with no obligation.
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• Read Buying Your First Condo in Burnaby: A Practical Family Guide for Metro Vancouver Buyers for a related BC mortgage perspective.