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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