How to Get a Mortgage Postbankruptcy

Q: I filed for bankruptcy a few years ago but have managed to get back on my feet. Now my partner and I would like to buy a house, and we've saved enough together for a sizable down payment. He has excellent credit; I still have the bankruptcy on my credit report. Would it be best if we put the house in his name? If so, how do I protect myself and secure my half of the house if we break up?

A: First, let's focus on the big issue here: getting a mortgage. It's great that you've saved a down payment—lenders love to see that these days. And if you've managed to stay on track with your bills for at least two years since your bankruptcy, you can indeed qualify for an FHA-insured mortgage. But that bankruptcy is still going to be a factor in this deal.

The advantage of both partners applying for a mortgage is that two incomes will typically help you qualify for a larger loan. In fact, it's possible you couldn't qualify based on just your partner's income. So if you need both of your incomes to make this work, I'm afraid you may hit a speed bump—because, as you guessed, your FICO credit rating will definitely influence a lender's assessment of your application. You each have three scores (from Equifax, Experian, and TransUnion). Usually a mortgage lender will take an average of your scores and an average of your partner's, and then use the lower figure. I wouldn't be surprised if your average score is still below 640, and that could make for a much more expensive mortgage. For example, at press time a $250,000, 30-year fixed-rate mortgage obtained with stellar FICO scores would cost about $1,234 per month. The same loan based on a credit score below 640 would be $1,478. That's $244 more a month, and over the life of the loan that comes to nearly $90,000 in additional interest. (Yes, you read that right.)

So the question is whether your boyfriend can qualify for the loan on his own. If that's feasible, he could then add you to the title, giving you equal financial rights to the home. But that's asking a lot of him—you'll effectively co-own the property, yet legally only he will be on the hook for the payments. If that's the route you take, your best option may be joint tenancy with right of survivorship. You and your partner would be equal owners of the home with equal rights, and if one of you passed away the survivor would continue to own the home. You'll want to have an attorney familiar with your state's property and estate laws draw up the right ownership documents.

Having said all that, my best advice is to slow down. If you wait another year or so and continue to pay your bills on time, your FICO score will continue to improve. One of the biggest misconceptions is that your score stays in the dumps until the bankruptcy is removed from your credit report (with a Chapter 7 bankruptcy, that can be 10 years; for Chapter 13, it's seven). Although the bankruptcy will continue to show up, its impact on your score will lessen over time. Be fanatical in your bill paying, continue to reestablish your credit (with a secured card if necessary), and keep your overall debt-to-credit limit low, and your score will be on the upswing sooner than you think.

Next: Are your partner's finances dragging you down?

Suze Orman's most recent book is her Action Plan: New Rules for New Times (Spiegel & Grau). Click here to ask Suze a question!