June 6, 2014

“My wife and I are looking to purchase a $450,000 home, and I am wondering whether I should apply for the mortgage we will need as an individual, or jointly with my wife? I make $84,000 a year and have a credit score of about 800. She makes $48,000 and has a credit score of about 680.”  

Congratulations on considering this question before you start house shopping. The extra time could come in handy, as I’ll explain shortly.  

However, you haven’t given me enough information to answer your question. In addition to your incomes and credit scores, I need to know your financial assets and debt payments, held individually and jointly. Also, give me your best guess as to how long you will have the new house. 

“I have about $25,000 of financial assets in my name and no debts, she has $32,000 and no debts. Figure we will be here for 7 years.” 

Single Versus Joint Application 

When you apply for a mortgage jointly, your incomes are combined, and so are any financial assets that are carried in your individual names. Combining income and assets strengthens your application, making it more likely that you will qualify for the mortgage you want.  

On the other hand, a joint application also requires that you combine the debt obligations of each party that are carried in separate names. That is not an issue for you, but it could weaken other applications. The other downside of the joint application is that the lower of the two credit scores is used in pricing the loan. You do have that problem.  

Qualification Versus Pricing 

 In deciding whether to apply singly or jointly, you need to consider the implications of the decision separately for qualification and pricing. Qualification is a yes/no affair, you either qualify for a particular loan type, or you don’t. If you can only qualify by applying jointly, then that is what you do, and there is nothing more to consider. If you can qualify singly, you might still want to apply jointly if doing so results in a lower cost, a possibility considered below.  

Your Qualification 

In determining whether or not you qualify, I used the qualification calculator on my web site. The calculator shows the mortgages for which a user qualifies, the mortgages for which they don’t qualify, and exactly what they need to do to shift a mortgage from the second category to the first.  

In qualifying you singly, I assumed that you put 5% down, which uses up most of your cash.  With 5% down and a credit score of 800, you qualify for a 30-year fixed-rate loan and a 5/1 adjustable. You do not qualify for a 15-year fixed rate loan, however, because the larger payment on the 15 brings your debt-to-income ratio to 49.9%, which is above the maximum of 43%.  

If you apply jointly, the larger joint income allows you to qualify for all three mortgages including the 15-year. This is only relevant if you want the 15, which saves on interest cost but carries a substantially higher payment. 

The Cost of Single Versus Joint Applications 

If you can qualify either way, your selection of single versus joint application can be based on the one that results in the lower cost. I measure your costs over the 7 years you expect to be in the house. They consist of upfront fees and charges, monthly payments including mortgage insurance, and interest loss on both upfront and monthly charges, less tax savings and balance reduction. On May 30, the total cost to you of a 30-year fixed-rate mortgage on a joint application was $100,499 compared to $112,634 on a single application. The cost difference on a 15-year was about the same.  

The reason that a joint application will save you money is that your wife has enough assets in her own name to double the size of the down payment, from 5% to 10%. The cost reduction resulting from the larger down payment swamps the cost increase stemming from using her lower credit score. 

Managing the Process 

If you use a loan officer or mortgage broker to guide you through the process, their focus will be on qualification rather than pricing. If you can’t qualify, there can be no deal, and no deal means no commission.  If you can only qualify in one way, whether it is single or joint, that is the way he will guide you. And that’s OK, because on that issue your interests and those of your advisor are aligned. But if you can qualify either way, then you want to use the option that will cost the least, and in making that decision you may not receive any help.  

Yet the issue is very simple. A joint application means a lower credit score which raises the price, so you do it only if the spouse with the lower credit score has enough financial assets to lower the mortgage cost by increasing the down payment. NOTE: The increase in down payment must go past a pricing notch point : 5%, 10%, 15% or 20%. An increase from 5% to 9% will not help but raising it from 9% to 10% will.  

Of course, it would help even more if your spouse transferred her assets to you, so that you could apply singly with both a larger down payment and a higher credit score. I don’t recommend making an asset transfer on a temporary basis for the sole purpose of increasing the down payment, and the underwriter won’t allow it in any case. If you want to go this route without a challenge, the asset transfers should occur no less than 90 days prior to the date of the loan application. Because you started thinking about this early, you have the 90 days that are needed.