Congratulations, you’re engaged.
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You’re now looking forward to getting married and settling down. However, when you say “I do,” you’re not just saying “I do” to that person, you’re also saying “I do” to their finances — for better or worse. And the finances will dictate your ability to purchase a house.
Unfortunately, the American Dream of homeownership can easily be squashed if would-be buyers don’t plan accordingly in their endeavor to buy a new home. In fact, the traditional practice of getting married, then settling down (or “nesting”) might not always be the best tactic. Depending on your circumstances, you might be better off buying a home before you walk down the aisle. Here’s when to consider doing just that.
What You Should Know Before Tying The Knot
Debt: The single most limiting factor is the debt of your future spouse. Let’s say your spouse has student loans, credit cards, an auto loan and many other payment obligations. If you’re buying a house, there’s a good chance even if they are not on the loan, their debt obligations will be counted against your qualifying ratios, significantly reducing your ability to qualify for the loan and consummate the house purchase.
Here’s the skinny: If you are buying in a community property state, (California is one of them), the debt of the non-signing spouse is automatically joint no matter who is on the loan. You can solve this problem by buying the house before the wedding. The lender will not be required to look at both credit reports because you are not yet married.
Credit Score: Let’s say your credit score is 800, and your spouse’s credit score is 620. Lenders always use the lower of the two credit scores. It would be awfully unpleasant to have to pay a substantially higher interest rate on a mortgage loan when you have excellent credit. In fact, if we look at a loan amount of $300,000 with a 30-year fixed rate mortgage, an individual with an 800 credit score could secure a 4.625% interest rate, whereas someone with a 620 credit score might receive a 5.5% interest rate.
The higher rate translates into $161 per month more in interest, meaning you’ll pay $57,942 more in interest over the life of the loan – all because your spouse has a 620 credit score. You can solve this problem by -- you guessed it -- buying the house before you get married. If you know enough ahead of time what your respective credit scores are, you might be able to work toward raising them before you buy. Either way, it’s good to keep tabs on your score for many reasons. Using a free tool like Credit.com’s Credit Report Card to monitor your credit score can help you plan for your current and future credit needs.
Cash: If your spouse can’t source cash deposits going into their bank account, you both lose. Even if the money is not being used in the home purchase, the mortgage company is still required by federal law to source any deposits beyond one’s normal income source. Here’s another problem that’s solved by buying the house first.
Loan Type: If you’re using a conventional loan to buy a house when you’re married, and the other spouse is not on the loan, their debts will not be included in your debt ratio (which informs how much you can borrow) as they otherwise normally would. On the other hand, your spouse’s debts will be factored into your debt ratio if you are using loans by the FHA, VA and the USDA.
Applying as a Couple
When you’re married, lenders will look at your ability to qualify for the house purchase based on a joint application, unless specifically stated otherwise.
By qualifying for the loan prior to getting married, a prudent couple stands to gain the most benefit because they have more options. This is true when it comes to how their loan is structured to best qualify them for a favorable interest rate, as well as getting a more favorable house payment and better down payment financing. Bottom line: Being married when you buy a home can limit a lender’s options for getting you qualified.
So congrats on getting engaged! Now go talk to a mortgage lender to see how your financing options can line up. Doing this before you get married can mean the difference between getting a home now … or getting one many years down the road.
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