Most couples used to get married before making any major financial decisions together. But today, one in four unmarried couples between 18 and 34 buy a house together, according to a survey by Coldwell Banker Real Estate.
What’s more, 40% of millennials think it’s actually a good idea for unmarried couples to buy a house, and 37% think couples should be homeowners before marriage.
There are plenty of good reasons for unmarried people to buy a house today, including low mortgage rates, rising home prices and the tax deductibility of mortgage interest. Besides, groups of investors buy houses all the time – and most of them aren’t married.
But buying a house outside of marriage can come with big risks. Unless you know how to avoid the potential pitfalls, locking in on a home with your unwed partner could be a costly mistake.
Share Financial Info
Before you and your partner begin house — hunting, exchange personal finance information, including salaries, debt (student loans, credit card balances, car payments, etc.) and credit scores.
Not only will this information help you estimate how much house you can afford, but you’ll also need to determine how much money each person can contribute to the downpayment, closing costs and monthly mortgage payments.
You also need to know upfront if your boyfriend or girlfriend has a lower credit score.
Because mortgage lenders treat married couples as a single entity, these couples can qualify for sizeable loans with good terms and rates as long as one partner has a good credit history.
However, lenders treat unmarried couples as individual home buyers. If one applicant has a bad credit score, it may reduce the amount banks will lend and will also lead to less favorable rates and terms.
Also keep in mind that if your partner ever stops contributing to the mortgage, you’ll be liable as a co-signer to pay for the whole thing.
So not only is it good to know your significant other’s financial status to gauge how much home you can buy, it also makes sense to get a mortgage that you could pay off yourself if it comes to that.
How to “Take Title”
Once you and your “better half” create a budget and decide how to split the costs of buying and maintaining the house, consider how you will own the home, or “take title.”
Here are the three basic options:
- One person can hold the title as sole owner.
- Both people can hold title as “joint tenants.”
- Both of you can share title as “tenants in common.”
You might be tempted to pay scant attention to this issue, but that could be a very expensive blunder.
Even if your relationship stands the test of time and you never break up, consider what would happen if one of you died. What would happen to the house and your investment?
The answers to those questions hinge on the ownership arrangement. If you aren’t careful, you could find yourself losing your home – even if you contributed thousands of dollars to the mortgage and other expenses.
On its face, this seems like a bad option for unmarried couples — and it usually is.
If your partner’s name is the only one on the deed, he or she is the only legal owner. This means that your partner can sell the house (or bequeath it to someone else), and there’s nothing you can do about it.
Why take this route?
Often, it’s done when one partner’s credit is so bad that the couple would never qualify for a mortgage. Sometimes, a higher-income partner simply wants all the house-related tax deductions.
Fortunately, one person can take the title as sole owner and later add the other partner’s name to the deed. But before you do this, consult an experienced real estate lawyer. Officially adding the other partner’s name to the deed might allow your mortgage lender to call in the loan, and in some areas, you may have to pay transfer taxes and fees to add a name to the deed.
This arrangement is suitable when partners own equal shares of the house. (If the partners own unequal shares — 60/40 or 70/30, for example — you’ll want to be tenants in common.)
The biggest benefit of joint tenancy is that neither owner can sell the house without the other’s permission.
Also, if one joint tenant dies, the other automatically inherits that person’s share, even if the deceased left a will stating otherwise. This is known as “right of survivorship,” and some states even require that you add the phrase “with right of survivorship” to the agreement.
If one partner decides to sell their share in the house, however, the joint tenancy ends, and the new shareholder and you become tenants in common.
Tenants in Common
This is the most common way for unmarried couples to take title. There are two reasons for this:
- The arrangement allows the partners to own an unequal share of the home.
- When one person dies, that partner’s share can be left to whomever the person wishes. In other words, the share doesn’t automatically go to the other tenant in common.
If you own unequal shares, though, be sure to “memorialize” the percentages in writing — in a property agreement, partnership document or cohabitation agreement.
Otherwise, the law will usually presume that you have a 50/50 ownership arrangement with your co-owner.
Keep in mind that not all relationships last forever. An ownership arrangement can help you be prepared, in case the relationship ends.
It’s also a great idea to consult with a real estate attorney before signing anything.