First comes love, then comes ... a mortgage?! That’s right:
Many couples are buying a home together before tying the knot. In fact, 1 in
4 homeowners said they purchased a home with their significant other
before marriage, according to a 2016 survey by TD Bank. And that's presuming
they end up tying the knot after all; many continue cohabiting without
ever heading down the aisle.
But
getting a home loan as an unmarried couple presents some unique financial
challenges. For starters, you need to consider the possibility—slim though
it might seem—that you might break up one day. Yes, these things happen.
"You
need to look at the worst-case scenario,” says Ray Rodriguez, a New
York sales manager at TD Bank. “It’s not a pleasant conversation, but
you need to have it.”
After all, purchasing a home together is ultimately a business
decision. You, as an individual, need to take steps to protect your investment.
So, before buying a home with your significant other, make sure not to
make these common mistakes.
Mistake No. 1: Not discussing your
credit history
Even
if you’re applying for a loan together, you’re going to be assessed
by the mortgage lender as individuals. Married couples are sized up
individually, too, but since they're hitched, they've likely had some in-depth
money talks already. Unmarried couples may have put off this topic, but it's
time to ask each other some tough questions—starting with your credit score.
Your credit score, of course, is primarily a measure of how well
you've paid off past debts; you can get a free estimate of this number at
Credit Karma. Even if your credit score is sterling, if your
partner's is subpar, you as a couple could be seen as a lending liability.
"We
use the lower score of the two individuals when
qualifying the couple for a loan," says Rodriguez. And if someone's score
isn't up to par, "this could mean you'll be required to make a higher
down payment, or you get a worse interest rate, or you won't even qualify
for a loan at all."
One
potential solution is to have only the person with better credit apply for the
loan. However, in doing so, you'll have to forfeit including your
partner's salary in your assets, which might weaken your application.
“Most
times you need both incomes to qualify for the mortgage,” says Keith
Gumbinger, vice president at HSH.com,
a mortgage information website.
The
good news is, the sooner you know your partner's credit history, the sooner
you'll get to fixing any issues before they throw a wrench in your
home-buying plans.
Mistake No. 2: Planning who pays what
with a hug and a kiss
Sorry,
romantics: You can't just assume you and your significant other are just
automatically in sync about who pays what, and this is particularly true
if you're unwed and lack the legal protections marriage provides. So
you’ll want to draw up a legally binding contract (with help from a real estate
lawyer) that spells out the following parameters:
- What each person contributes to the down
payment
- How much equity each person has
- What each party will pay, including the
mortgage, taxes, utilities, and maintenance
Don't
assume you have to go 50-50. "Many couples do 70-30 or even 80-20,"
says Gumbinger.
Most
important, the agreement should include a provision as to what happens in the
event that you two break up, says Debra Neiman,
a certified financial planner and co-author of "Money Without Matrimony:
An Unmarried Couple's Guide to Financial Security."
For
example, which party has the right to buy the other one out? And if that
buyout happens, how many appraisals would you need to determine the
property's fair market value?
Spelling these things out now will help you avoid disagreements later.
Mistake No. 3: Not considering your
title options
Sure,
you may live in this home together, but there are actually
three ways that couples can "own" a property. Here's how to
tell them apart and decide which way is right for you.
- Sole owner: The only time you’d want to put just one
person on the title is if that person will retain 100% equity
of the property—which might make sense if that person is
exclusively shouldering the mortgage and other costs with owning the
home.
- Joint tenants: If one person dies, the other
automatically inherits the other's stake and owns the entire property.
This “makes sense if you’re going in 50-50,” says Gumbinger. Many
married couples opt for joint tenancy.
- Tenants in
common: This stipulates
that if one person dies, ownership will not automatically transfer to the
other homeowner unless that person is named in the will. Instead, the
deceased owner's heirs will inherit those shares. This can
be a good choice if one or both partners have kids or family from a
previous marriage to whom they want to pass on the property if they die.
Mistake No. 4: Making house payments
separately
While
married home buyers often join bank accounts, many unmarried couples
are hesitant to commingle their finances. That's a valid concern, but if
you're paying a mortgage and other home expenses together, having a joint
account—into which you both contribute money from your separate accounts—can
help streamline your house payments immensely.
After all, you can't
write two separate checks for your monthly mortgage, so having one account
just makes sense (and setting up automatic payments ensures they'll get paid).
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