More unmarried couples are buying houses together, with such couples representing 9% of homebuyers in 2020. While many aspects of homebuying are the same no matter your marital status, buying a house before marriage presents special concerns.
Decisions that seem routine to married people, such as how to title a home, may be more complicated for an unmarried pair. To protect their individual assets and determine the best way to buy a house, unmarried couples should discuss their financials and broach the uncomfortable topic of what happens in a possible future break-up. Here are five questions to consider.
Who’s applying for the mortgage?
Depending on the lender, one of you may have to apply for the mortgage as an individual. Other lenders offer mortgage loans for unmarried couples.
Lenders can’t treat unmarried people who apply for a joint mortgage any differently than they treat a married couple, according to the Consumer Financial Protection Bureau.
However, if you apply together, the lender will analyze your credit scores separately. The lender will base the lending decision on the credit scores of the partner with the lower score. If one partner has a higher credit score than the other, it may make sense for that person to apply for the loan individually.
If you owe substantial debt, such as student or auto loans, your debt-to-income (DTI) ratio may be too high to qualify for a home loan. To calculate your DTI, divide your total monthly debt payments (including your expected monthly mortgage payment) by your gross income. Lenders prefer your DTI to be below 43% to ensure you can afford a mortgage.
If one partner’s DTI is significantly lower, they may qualify for a better interest rate by applying as an individual.
The advantage to applying for a joint mortgage is that the lender uses both incomes to determine the amount you qualify for. If you both have similar credit scores and DTI ratios, you might qualify for a larger mortgage by applying jointly.
How should unmarried couples buying a house hold title?
Buying a house before marriage has legal implications, namely you must decide how you’ll hold title. How you hold title to the home reflects ownership. It also affects what happens if one partner dies, wants to sell their share, or if the two of you break up.
Even if you don’t have a joint mortgage, you may decide to have both partners’ names on the title.
The most common ways to hold title are:
Sole owner: If only one partner is listed as the owner, he or she has all the rights of ownership, including the right to sell the property, even if the other partner has contributed to buying the home. If the owner dies without a will, the surviving partner may have no right to the home.
Joint tenants: Joint tenants own equal shares of the property, so when an unmarried couple holds title as joint tenants, each partner has a 50% share. Joint tenants have “right of survivorship,” which means when one partner dies, the surviving partner receives the other’s share of the house automatically.
Tenants in common: Tenants in common each own a share of the property, but it doesn’t have to be 50-50. If one partner contributes more to the down payment or pays more toward the mortgage payment, the couple might mutually agree that the higher contributing partner owns a larger interest in the property. After selling the home, the partners would split the proceeds based on the share they own.
When you’re tenants in common, either partner can sell all or part of their share in the home or pass it on to their heirs. Unlike joint tenants, tenants in common don’t have the right of survivorship and could end up sharing ownership with their partner’s heirs.
How should things be divided in a cohabitation agreement?
Unmarried couples buying a house together should create a cohabitation agreement, or living-together agreement, before they start house-hunting. No couple wants to think about breaking up, but it’s important to have a plan that takes a possible split into account.
Unmarried couples can’t depend on laws and centuries of legal precedent about dividing assets when they end their relationship, so they should formalize their decisions in a written agreement. Answering these questions now can save you pain and ensure each partner gets back their financial contribution.
The agreement should be specific to your situation. If you’re buying a house, it should cover topics such as:
- Share of ownership for each partner.
- How much each will contribute to the down payment, closing costs, monthly housing expenses (mortgage payments, property taxes, homeowners insurance, and homeowners association (HOA) fees), and future repairs/upgrades.
- How the property will be handled in a split. Can one partner buy out the other’s share? Will you sell the house and divide the net proceeds?
- How you will resolve disputes. If the breakup isn’t amicable, will you accept mediation?
Should you wait until after marriage to buy a home?
If you and your partner are seriously thinking about getting married, waiting until after the wedding to start the homebuying process might make the legal process less cumbersome
If you buy the house first, then get married, you may want to change the way you hold title. Changing the title may not be as easy as just adding a name to it, the American Bar Association warns.
Beyond the expense of legal paperwork, changing the deed can also have tax consequences. For example, if one partner is the sole owner and the couple changes the title to joint tenancy, half the ownership changes hands. The 50% share of the house the new person on the title receives might be considered a gift, triggering the gift tax. The lender may also require you to refinance if you change the title.
What happens to the home if the relationship ends?
Couples sometimes decide to go separate ways. Or one partner dies. If this happens and you’re unmarried, the home’s status depends on decisions you made when you initially purchased the house, such as whose name is on the title. That’s why having a cohabitation agreement is vital.
If you break up, you decide what happens to the house. If you agree on what share of the home you each own, or if it’s spelled out in the cohabitation contract, you can sell the house and split the proceeds. Or one of you can buy out the other’s share. If you sell your share to your partner, there may be tax consequences to the sale, so consult a tax specialist.
The situation can get unpleasant if one partner is listed as sole owner on the deed but the other partner believes they’ve contributed to buying the house through mortgage payments, paying for repairs, or similar activities. You may seek mediation to resolve the issue.
If one partner dies, the title and the late partner’s will determines who gets the house.
- If you’re joint tenants with the right of survivorship, the surviving partner gets the house.
- If you’re tenants in common or the deceased partner was the sole owner, the partner’s share of the home passes to his or her heirs. If you’re not married and there’s no will, you’re not your deceased partner’s heir. The courts will decide who inherits the decedent’s share of the house.
You get it: Buying a house before marriage raises many legal and tax implications that married couples don’t face. If you’re considering getting hitched, you could avoid some of these issues by buying after you tie the knot. If you choose not to get married, though, having a strong cohabitation agreement may preempt some issues.
Consult an attorney or a local FAM Loan Advisor for advice before moving forward.