6 Steps Couples Should Take Before Buying a House
Whether you’re single or married, you need to take several key steps before setting your down payment goal as you prepare to buy a house. Married couples may be able to afford more with two incomes, but they may also have extra complications if one spouse brings a lot of debt or a bad credit record to the marriage. They need to decide whether it’s better to apply for the mortgage together or if they’ll improve their chances by having the spouse with the better credit record and less debt apply alone.
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Before you start serious house hunting, you need to make some key decisions about how much house you can afford, how you can improve your mortgage application and how to reach your down payment goal.
Calculate How Much You Can Afford
Whether you’re married or single, the first step in your home search is to figure out how much you can afford. “One easy way to do this is to simply multiply your monthly gross income by 0.28,” said Jacob Channel, senior economic analyst at LendingTree. “As a general rule of thumb, you should aim to spend no more than 28% of your monthly income on housing costs so that you can be sure you have enough money left over for other necessary expenses.”
Married couples with two incomes may have more flexibility to make house payments with two incomes — you’ll still have some income coming in if one spouse loses his or her job.
If only one spouse works, you don’t have the backup of another spouse’s income — it’s even more important to build up an emergency fund so you can continue to pay the mortgage if your income stops or you have unexpected expenses. You may want to be more conservative and choose a smaller percentage of your income when determining the monthly payments you can afford. Also keep this in mind if one spouse plans to take time off from work when you have young kids, even if you’re both working now. Having a lower mortgage payment will give you more options.
You can do a more nuanced calculation with an affordability calculator like LendingTree’s tool, which can help you figure out how much home you can afford and also show how much you’ll end up spending based on a variety of factors, such as the size of your down payment, the interest rate you’re offered and the other kinds of debt you have.
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Know Your Joint and Separate Debt-to-Income Ratio
One of the key calculations that lenders run when you apply for a mortgage is the debt-to-income ratio. You can calculate this number by adding up your monthly debt payments and dividing it by your monthly gross income (your income before taxes and other deductions). “Generally speaking, lenders prefer to see DTIs lower than 36% for people applying for a conventional mortgage,” Channel said.
That figure can go as high as 43% including mortgage payments on a conventional mortgage, and sometimes up to 50% on an FHA loan, “but that usually requires a larger down payment and/or better score to go that high on the DTI,” said Thom Dellwo, a financial counselor and HUD-certified housing counselor with the Syracuse Financial Empowerment Center. Even if you can qualify for a higher DTI, however, you may have a tougher time making your mortgage payments if nearly half of your income has to go towards your debts — and even more after taxes are subtracted from your paycheck. Think carefully about how much you can afford in your monthly budget.
The basic calculation for the debt-to-income ratio remains the same whether or not you’re married, but if you decide to include both spouses’ income and debt when applying for the mortgage then the lender will look at your combined debt-to-income ratio. Run these numbers separately and together to see if there is a big difference.
“Sometimes jointly applying for a loan can make getting a mortgage easier if the two people applying end up making considerably more money and with a lower DTI ratio than what a single applicant would have,” Channel said. But this isn’t always the best strategy. “If your spouse doesn’t earn very much money and has a lot of debt, then applying jointly could end up hurting your chances of approval.”
Review Both Spouses’ Credit Scores Before Applying for a Mortgage
Your credit score is a major factor when applying for a mortgage because it shows lenders how well you’ve managed credit in the past. The most common credit score, called a FICO score, ranges from 300 to 850. You usually need a score of at least 760 to qualify for the best mortgage rates.
Married couples should find out the score for each spouse before deciding whether or not to apply for the mortgage together.
“If one spouse has a much lower credit score than the other or owes a lot of debts that they took out before they got married, then it might make sense to leave them off a mortgage application,” Channel said. “Lenders will look at the individual scores of everyone applying for a loan, not just the highest score, so a really bad score can easily cancel out a really good one.”
However, if one spouse decides to apply for the loan without the other, the lenders will only use the one income when determining the size of the mortgage they can qualify for. “If one spouse decides to apply for a loan on their own, then they may not qualify for as big a loan as they would have had they been able to combine their income with their spouse’s,” Channel said.
Prioritize Paying Down Debt for Both Spouses
You can improve your debt-to-income ratio — and sometimes your credit score — by paying down other debts before you apply for a mortgage. If you’re married, don’t forget to consider both spouses’ debts when deciding which ones to pay off first. “When you’re trying to pay down debt, it generally makes sense to target larger debts with higher rates first,” Channel said. “If you get married and your spouse brings with them a large sum of debt, then you may want to focus on using your combined income to pay down that debt before you start seriously considering buying a house.” But don’t devote so much money to paying down debt that you end up without enough money for emergencies and other expenses — which could end up landing you in more debt in the end.
“Remember that some debt isn’t necessarily a deal breaker when it comes to applying for a mortgage, so you don’t have to worry about being 100% debt-free before you start looking for a mortgage lender,” Channel said. “With that said, the less debt you have, the more likely you are to find a lender who offers you a competitive rate.”
If one spouse has a high balance on federal student loans, it can help to consider the different types of payment plans — such as pay as you earn, income-based, or income-contingent repayment plans — and the impact the different options can have on the mortgage application, Dellwo said. A HUD-approved housing counselor can help you figure out what strategies might work best for you.
Decide Whether To Apply Together or Just One Spouse
Married couples have the flexibility of deciding whether to include both spouses on the application or just one. “If you both have good credit scores and not a lot of debt, then a joint application can be a great way to get access to a bigger loan,” Channel said. “If one spouse has bad credit and a lot of debt and the other doesn’t, then a single application might be the best option.”
If you do decide for just one spouse to apply for the mortgage, the other spouse can still help with the costs. “Even if a spouse isn’t listed on a loan, they can still help by providing extra cash for upfront costs like down payments, or recurring costs like the mortgage payment itself,” Channel said.
Also, consider taking steps to include both spouses on the deed to the home. “They should consider having the non-borrowing spouse added to the deed in case of the death of the borrowing spouse,” Dellwo said. “The borrowing spouse should think carefully about this as the non-borrowing spouse will own the home equally but technically be on the hook for the mortgage payment. Of course, if the borrowing spouse were to stop payment the non-borrowing spouse would still need to pay the mortgage or risk foreclosure.”
Make a Plan To Reach Your Down Payment Goal
After you’ve decided how much house you can afford, you can set your down payment goal. Traditionally, you needed to make a 20% down payment to buy a home without having to pay for private mortgage insurance. You may be able to get a mortgage with a lower down payment but you may get a better interest rate if you set aside more money — and you’ll have lower monthly payments and less debt.
“I usually encourage folks who can’t do 20% to do at least 5% and expect to pay PMI,” Dellwo said. Private mortgage insurance tends to cost from 0.5% to 1.5% of the loan amount per year. And no matter how much you set aside for your down payment, don’t forget that there will be other expenses, too. “The other thing I see people get confused about is that 20% down is actually 20% plus closing costs.” Closing costs tend to be 2% to 5% of the loan balance — in addition to the down payment.
Whether you’re married or single, setting up an appointment with a housing counselor can help you determine how much house you can afford, the steps you can take to improve your mortgage application and how much to set as your down payment goal. You can search for housing counselors in your area who are approved by the U.S. Department of Housing and Urban Development here. Many of these counselors work at local nonprofits.
“The housing counseling session reviews income/expenses, current savings and available grants for down payment and closing costs, steps to homeownership, types of mortgages, and can provide referrals (at least 3 per type) for all the other professionals that can help on the way to closing on your home. Housing counselors help create a concrete action plan for the next steps to homeownership,” Dellwo said.
They can also help you figure out how to adjust your budget to reach your savings goals. Some married couples use a strategy of paying bills with one spouse’s income and saving the other’s income. Others set aside a portion of both of their incomes to save for the down payment — and work together to cut back on other expenses and prioritize their down payment savings until they buy the house.
“I think the most important strategy for a couple to start out with is communicating honestly about their interest in doing what it takes to become a homeowner,” Dellwo said. “An open conversation in which the couple creates a spending plan that makes room for saving a certain amount each month and then clearly committing to each other to save their portion is important.”
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