There are a number of couples now who forgo looking for the perfect ring setting and focus instead on finding another setting – the place they will call home. It used to be that couples would get married before making any major financial decisions together. That’s no longer necessarily the case.
In fact, according to recent data from Zillow, unmarried couples represent 15% of young homebuyers, age 24 to 35. In 2005, those buyers were only 11 percent of the same market. This makes sense when you consider rising home values that make two incomes a virtual necessity for many homeowners.
Low Interest Rates + High Apartment Rents = Smart Time To Buy
A compelling reason that motivates this decision is the still historically low mortgage rate landscape. Rising rentals rates and the ability to deduct mortgage interest from incomes taxes also factor into the equation. A large percentage of young unmarried couples will put off matrimony but not their home purchase and the long-term financial benefits homeownership may bring.
While it may be a very practical and sensible choice for many, it’s also a financial decision that must be made cautiously and with forethought because of the financial implications for the two parties concerned. It’s arguably one of the most important financial decisions you’ll ever make and that’s why you need to make sure you know what you’re getting into and how to protect your interests.
Even though no couple enters into a relationship expecting it to end, it can be more complicated to divide the co-ownership of a house than it is to get a divorce. That’s why we are providing these helpful tips before you meet with your realtor.
Be Transparent, Share Financial Info and Compare Credit Scores
Before you dive into homeownership with your unwed other half, it’s important to have a frank discussion about your respective financial histories, credit worthiness and future goals. While you might have already shared details of your income and savings to estimate how much home you could buy, your credit score is key to discuss well prior to closing.
The credit score of both parties can impact your ability to get a mortgage and the interest rate you’ll pay. A poor credit score may influence how you decide to title the property and who takes responsibility for the loan. While married couples are typically viewed as a single unit by creditors, unmarried couples are assessed as individuals. So you might want the person with stronger credit to purchase the home; eliminating the poorer score from consideration can help you secure a better rate.
While you can get married without knowing how financial stable your spouse is, when it comes to qualifying for a mortgage, salaries, debts and savings are all on the table. It’s the right time to come clean before a credit report is run and red flags can derail the process.
Get a Home Prenup
Think the standard real estate purchasing agreement is all you need if you’re part of an unmarried couple? Think again. Your home purchase is likely your largest asset and largest debt so it’s crucial to have a legally binding agreement in the event (however unlikely) something goes wrong.
A prenuptial or partnership agreement can help address any issues such as who is contributing financially to the mortgage, how it’s being paid, who is paying for what and what happens if you sell the house or the relationship ends. A prenup can essentially settle disputes without any costly or lengthy litigation or mediation, and help to mitigate animosity as well. The agreement clearly defines what happens if one partner is unable or unwilling to meet their financial obligation.
It’s important to note that when an unmarried couple enters in to a financial contract such as a home purchase, both credit scores are impacted by the purchase.
Open a Joint Account
You should consider opening a joint bank account to pay for the mortgage, property taxes, insurance and maintenance. You can each set up automatic monthly deposits into the account from your individual bank accounts — this way neither one of you will forget.
Decide How to Manage Costs
When you cosign on a mortgage, you are 100% liable for the debt. That means if the relationship goes bad and your other half stops paying, you must assume the entire obligation. For this reason, it’s a good idea to choose a home with a mortgage that can be paid with some cushion by a single income. It’s a precaution that not only helps in the event of the relationship souring, but also if an unexpected injury, illness or loss of job occurs.
The Title Bout
Many unmarried couples want to own their home together, but you need to carefully consider your options. The way in which in your property is titled affects the way in which it can be transferred and can have tax consequences later on. That’s why you and your partner must decide how and who will own the home or take title. You have three options:
- One person can hold the title as the sole owner
- Both of you can hold title as joint tenants
- Share the title as tenants in common
Typically, you would both want to hold title, because putting the property only one person’s name leaves the other one without equity in the investment. But if both of you decide to sign the title as tenants in common, then you each own a specified percentage of the property.
Keep Track of Your Finances
Once you’ve decided to co-own a property with your significant unwed other, it’s important that you keep a written record of who has paid for what. For instance, if you decide together to make upgrades or improvements such as redoing the bathroom and the chief breadwinner foots the bill for the project, it’s understood that the other partner will be repaid for half the cost before the proceeds of the sale of the house are split. But this agreement can only be upheld if it can be clearly proven, who paid for what while both members of the couple were together.
Cover Your Backside
If you decide to proceed jointly to buy the house, you should consult with a real estate planning attorney as a couple, or make sure the proper protection and agreements are in place. You’ll also want to keep your attorney in the loop to ensure the deed reflects your most current home situation. If you ultimately get married, have kids or if you decide to go your own ways, the attorney needs to be informed. If the situation isn’t handled properly, you could be in the less than desirable positon of having to share the proceeds of your home long after the relationship has gone south.
Your home can provide many years of joy, whether or not you’re married. By taking the right steps before you buy, you can help ensure that you and your significant other are protected, whether your relationship outlasts your mortgage, or not. To learn more about your home loan options as an unmarried couple, contact a PrimeLending Loan Officer today.