A Real-Life Problem
Alicja and Jan Kowalski got married a few years ago. They saved some money and, with the help of their parents, are ready to buy a house. They found a modest but well-maintained house that meets their needs. Mr. Jan earns well and can work remotely, so a larger living space would be useful. Alicja also has a promising job and managed to keep it despite the recession caused by the pandemic. So, they can afford their own roof over their heads. Unfortunately, the bank denied them a loan. They went to another bank, where they met with similar disappointment. Why?
How is Marriage Perceived?
When two people apply for a loan, the bank considers the sum of their savings and income, but not the sum of their credit scores! The bank doesn’t even consider the score of the spouse with better creditworthiness but… looks at the lower score.
As for the Kowalskis, Jan has always been responsible, and his credit score is strong, entitling him to a loan on the best terms. He did not expect that his wife’s “sins of youth,” an overdue student loan, and delayed credit card payments, which made her creditworthiness much worse than her husband’s, would be an obstacle to his life plans.
Lenders take the credit scores of both spouses from three credit bureaus and calculate an average for each of them. The score of the spouse with the worse result is taken into account when deciding whether to grant a loan and to determine its terms. A poor score from either spouse results in a high interest rate on the loan, or even a rejection of the application.
Credit Score Review
A credit score (scoring, from the English word “score”) is an assessment of our creditworthiness. It is a number that tells the bank the probability that we will diligently repay a loan. Banks obtain this score from credit bureaus. To calculate the score, credit bureaus usually use a mathematical model developed by Fair, Isaac Company (FICO) – an equation into which various variables taken from the client’s credit report are inserted. By comparing the score with the solvency of thousands of past borrowers, banks identify the level of risk and decide whether to grant the client credit, and if so, under what conditions.
Credit scores range from 300 to 850 points, where 700 is the threshold below which it is difficult to get a loan on good terms.
Marriage Score
The bank makes a decision on granting a mortgage loan to a married couple taking into account their joint savings, joint earnings, but the lower credit score of one of them. Thus, the worse creditworthiness of one spouse seriously lowers the couple’s chances of getting a loan, or at least worsens the loan terms.
To get a mortgage loan on the best terms, both spouses should have an average score from three credit bureaus of 720-740 points or more. The lower the score, the more expensive the credit will be. If one spouse’s FICO score is below 620 points, it will be difficult for the couple to get a loan under any conditions. The reason is that the bank will not be able to sell such a loan to the Federal National Mortgage Association (Fannie Mae).
If the average score of the spouses is only 660, and the down-payment is 20 percent, then Fannie Mae, which buys, insures, and sells loans on financial markets, may require an additional one-time fee of 2.5 percentage points of the borrowed amount.
Although the worse credit score of one spouse determines the terms of the mortgage loan, it will not spoil the score of the other spouse. No person’s credit history negatively affects someone else’s history, even if they are married.
How to Get Credit with a Bad Credit History?
What can the Kowalskis do to get a loan in the current situation? There are two ways out: a higher down-payment, or applying for a loan only by the spouse with a better credit history. If Mr. Jan applies for a loan alone, the bank will only consider his credit history, but also only his income. Jointly held financial assets will count provided that both spouses’ names are on the title deed of the house.
The Kowalskis can also ask their parents to guarantee the loan (a topic for another article), or postpone buying a house until their credit history improves (reach for the book entitled “Life Anew“).
How to Avoid Problems?
Before you apply for any loan, check your credit history. Your spouse should do the same.
Credit bureaus collect financial information about us that makes up our credit history. The largest of these bureaus are Experian (www.Experian.com), Trans Union (www.TransUnion.com), and Equifax (www.equifax.com). At each of these bureaus, we can get a free copy of our credit history once a year, which means a total of three statements annually, and even more during the pandemic. This can be done conveniently through the website www.annualcreditreport.com. If you exhaust your limit, you will pay a small fee for the statement. Also, a copy of our credit history is due to us for free every time we are denied credit.
In your credit report, you will see a list of your accounts, payments and their timeliness, court judgments, bankruptcies, liens and foreclosures, and much other information, but there will be no credit score. If you want to know it, you can buy it, or get it for free when you order a paid service, for example, monitoring your credit account.
There are websites where you can find out your credit score for free, e.g., Creditkarma.com. More and more banks are making this information available to their customers for free online or in mobile applications.
If your credit score is less than ideal, you should improve it: correct errors in your file, pay off overdue debts, and behave responsibly. I discussed rebuilding creditworthiness in detail in the book entitled “Life Anew: How to Organize Problems in Offices”.
