Whether you are an unmarried couple committed to living together or engaged to be married, it might be tempting to buy a home together before interest rates increase. But is it wise?
State law governs how property is to be divided or distributed if a marriage dissolves before the mortgage is paid off. However, the law is less clear for unwed, domestic partners who jointly own a home. This includes same-sex couples, depending on the state where they reside. Unwed couples are best advised to proceed with some caution and invest in professional advice before purchasing property together.
Plan for the future
You’re in love. You foresee a long future together. Take off the rose-colored glasses and meet with a lawyer. It’s not pessimistic to plan for the “what ifs.” You are actually showing how much you care for each other and that you want to protect each other’s financial interests by anticipating potential problems before they arise. A mutually beneficial agreement can be crafted by a lawyer to address potential issues.
Before you meet with a lawyer, ask yourselves these questions. Having answers to these scenarios will make it easier for the lawyer to create a mutually beneficial agreement.
1. Will you both contribute the same amount for the down payment and closing costs?
2. Who will hold the property title? Consider these three ways to hold the title of your new home – sole ownership, joint tenancy, and tenancy in common. The way the title is worded can impact the way ownership is transferred and your rights to transfer ownership.
3. Will the monthly mortgage payment, property taxes and homeowners’ insurance be split 50-50? If not, will the proceeds of a future sale be split using the same ratio?
4. How will you split the cost and responsibilities of home maintenance and repairs?
5. If the property remains unsold after a break-up, does the person moving out have a stake in the home as an investment?
6. Does the partner who moves out keep paying their agreed-upon share of the mortgage? For how long?
7. Can one partner buy out the other partner rather than be forced to sell the property?
8. If one partner keeps the property, are they required to refinance the mortgage in their name?
9. If the property is sold, are the proceeds split 50-50?
10. What happens if one partner passes away? The title will determine what happens to the property.
If the title states joint tenancy, the surviving partner will receive the deceased partner’s share of the property. If the title is joint tenants in common, the percentage of the home owned by the deceased partner will go to their heirs, which could be the living partner if it’s stated in the will.
Applying for a joint home loan
To avoid any unwanted surprises during the mortgage application, each person should make a full financial disclosure and obtain a credit report detailing their complete credit history.
If both credit scores are similar and meet the credit score requirements for a mortgage loan, and both credit histories are clean, then applying jointly for a mortgage will not affect the credit decision. However, if one credit score is significantly lower, the credit decision will be based on the lower of the two scores, which could result in being offered less favorable mortgage terms.
If one debt-to-income ratio is lower (or significantly higher) when using both income sources on a mortgage application, this is likely to be considered by the lender evaluating your mortgage application.
While everyone in a relationship would like to live happily ever after, it’s better to be prepared for all outcomes rather than face financial hardship should the relationship end. Consulting with an experienced real estate attorney before you apply for a mortgage together can help reduce or eliminate complicated homeownership issues if the unexpected becomes a reality.