Spouse's Bad Credit Creates Mortgage Mess

BOSTON (TheStreet) -- Forget "Hey baby, what's your sign?" For anyone looking to buy a house with a spouse someday, "What's your credit score?" may be a better pickup line.

Thanks to recent loan-level pricing adjustments from Fannie Mae(FNM) and Freddie Mac(FRE), the lower a person's credit score is, the higher the conventional mortgage loan rate. In the case of couples who apply for a mortgage together, one spouse's stellar score won't make up for the other's lousy one. The lender bases the rates only on the lower of the two credit scores.

"Current underwriting guidelines require that the lender default to the lower score to make a credit risk determination," says Robert McDonald, principal at Mass Mortgage Group in Medford, Mass. With a score-based system, "a real-life review of a couple's credit profile/history is not allowed, thereby possibly disqualifying the couple from obtaining a mortgage."

Mortgage rates are at epic lows, thanks in part to the European debt crisis. But requirements and penalties associated with credit scores are at epic highs, and only those with the highest credit scores can reap the benefits of the lowest mortgage rates.

Mortgage broker Sonya Pitt recently evaluated the loan application of a couple in which the husband had a Fair Isaac(FICO), or FICO, credit score of 720, while the wife's score was 680. FICO's credit scale ranges from 300 to 850. While 680 used to be a respectable score, most lenders won't consider lending to anyone with a score below 620 these days. For that couple, the difference between 680 and 720 would have meant a rate of 5.5% instead of 5%, says Pitt, president of the South Carolina Mortgage Brokers Association and a branch manager at Network Funding.

Pitt recommends that the spouse with the higher credit score apply for the loan alone with one income, even though two incomes on a loan would improve the important debt-to-income ratio. "It is the lowest score of either borrower, whether they're the primary wage earner or not," says Pitt.

Leaving one spouse off the loan also is becoming more common among long-married couples who are in the process of refinancing a home, says Don Frommeyer, treasurer of the National Mortgage Brokers Association in McLean, Va., and a senior vice president at Amtrust Funding, a mortgage brokerage in Carmel, Ind., who recently assisted a couple in which the husband had a deal-breaking score of 580, while the wife had a score of 800. "They ended up refinancing in her name only."