Buying a house is a big step whether you're single or married. A mortgage is likely to be the largest financial transaction of your life and the dominant ongoing monthly expense in your budget. However, unmarried couples need to consider a few extra details during the mortgage journey. Paying careful attention to these items will help to ensure you don't encounter unpleasant surprises later on in the process.
It might be difficult or awkward, but the first thing both partners need to do is sit down and talk. You both need to be confident that your relationship is strong enough to enter into a major financial transaction together. If you've been together a short time or have doubts about the stability of your union, think twice about committing to a long-term mortgage together.
Part of this conversation needs to be a plan for how you'll handle expenses. Will you each contribute a portion of your income to the mortgage, based on how much you make? Or will each partner be expected to pay half? This goes for the ongoing mortgage payment as well as down payment, closing costs, and any associated real estate expenses.
If your relationship has progressed to the point where you're considering opening a mortgage together, you should probably have a joint bank account. One way to handle expenses is to source all payments from the joint account, and replenish that account according to your contribution arrangement.
It's also wise to consider a cohabitation property agreement, which is like a prenuptial agreement but for the property of unmarried couples. Such an agreement puts in writing what will happen to your joint property if the relationship should end, or if one partner dies. A real estate attorney can help you make sure all the proper boxes have been checked.
No one likes to think about a possible future breakup or the death of a partner, but the consequences of not planning for these possibilities can be devastating.
Whether you're keeping your money separate or combining it into a joint account, you need to make sure you're well-positioned to buy a house. Both partners need to ensure their portion of the down payment is accessible and that their credit score will support getting a great mortgage rate. If you'll need to sacrifice other monthly expenditures to make the mortgage payment work, make sure both partners are on board with those budget changes.
Depending on your situation, deciding whether to pursue a single application or a joint application may be an obvious choice, or it may be highly nuanced.
In a single application, one person applies for the loan and is legally responsible for all payments. The partner can still contribute to the down payment and monthly expenses, but their financial information won't be considered for loan approval purposes. This can be an advantage if one partner has high income and a great credit score, while the other does not. With only the high earner's information on the loan application, you could get a better rate on your mortgage. Of course, if the other partner decides to stop paying their portion of the bill, the loan applicant is still on the hook for the full amount.
With a joint application, both partners are listed on the loan as co-borrowers. Both are obligated to make the payments, and the combined financial information of both partners will be included in loan approval decisions. This can lead to the couple being able to purchase a more expensive home, particularly if both partners have good income and credit scores. If one partner has credit problems, however, it can drag down the whole process and stick you both with a higher interest rate.
Regardless of how you borrow money, it's how the title is recorded that indicates ownership. How to hold the title on your home becomes a bit more complicated for unmarried couples. It's nothing you can't overcome, but you do need to pay attention to the details to prevent potential future issues. You'll need to research your state's specific title options, but there are several common types: sole ownership, joint tenancy, and tenants in common.
Sole ownership means that one person owns the property, which can be an advantage if only one of you has a great credit score. If the relationship ends, however, the person who isn't recorded on the title loses any claim to the property.
Joint tenancy means that both partners are recorded on the title, and each owns 50% of the property. Right of survivorship ensures that if a partner dies, the other inherits their share. That's ideal for a stable, long-term relationship, but if a breakup occurs, you're stuck owning the property with your ex-partner (or trying to raise the money to buy them out).
Tenants in common is another title option that allows joint ownership other than 50% each. If the higher-earning partner pays 80% of the down payment and ongoing mortgage, they can own 80% of the property. This is a fair arrangement based on contribution percentage, but there's no right of survivorship. You would need to supplement this title with a will naming the other partner in order for them to inherit your share on death.
No matter what mortgage and title options you choose, the most important thing is that you go in to the process with your eyes wide open. Having a mortgage partner you can trust is half the battle. When you're ready to find the perfect house for you and your partner, contact Diamond Residential Mortgage to learn about your options. No matter your current situation, our experts are passionate about helping you achieve your home-buying dreams!