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Challenges facing two people buying a home

Two or more people coming together to buy a home is common and logical if they are in a lifetime relationship; however, if they are just coming together to casually buy a home, challenges may arise down the road. The obvious advantage to buying a home with another person is that income from both parties is combined to qualify for a larger mortgage. Just as the mortgage industry will combine their incomes, it will also combine their monthly debts. The combined monthly long term debts (credit card payments, car payments, student loan payments, child support, etc.) divided by the combined monthly income will determine the combined debt-to-income (DTI) ratio. Typically, lenders will accept DTI ratios in the range of 45 to 50 percent.

When applying for a mortgage, lenders will examine your credit history from the files of three credit rating companies: Experian, Transunion and Equifax. Each credit company will calculate a credit score for each borrower and it is the middle score of the borrower with the lowest score that will be used to determine loan approval and the points required (or rebated) for any given interest rate. In other words, the good credit of one borrower will not offset the poor credit of the other borrower.

Many lenders will also allow a buyer to become one of the borrowers even if they do not intend on occupying the home. That is, a homebuyer that may not have  enough income to qualify for the mortgage may ask a close relative to be a co-signer even though they will not be occupying the property. This person is referred to as a non-occupant co-borrower but will have all of the responsibility of the occupying homeowner. For example, if a mortgage payment is late, the borrower, co-borrower and/or non-occupant co-borrower will all receive notice of late payments on their credit reports.

If one borrower has bad credit it may be advisable to exclude that person from being a party to the mortgage. Of course, the downside in this case would be that the income from the party with bad credit would not be considered in the loan qualification or the DTI calculation. A person that will not be a part of the loan process may still be included as a co-owner on title to the home with all of the rights of a homeowner.

Borrowers that come together just to buy a home but do not have a relationship should enter into the house buying process cautiously. They should have a written agreement  between them that specifies what will happen if they split up and one decides to sell out. The services of an attorney would be advised.

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