Every year the number of cohabiting is increasing. According to the US Census Bureau, there were around 14 million unmarried couples living together in 2016, and one can only assume that the count has been increasing steadily.
It looks like more and more unmarried people prefer to buy houses together and not wait for marriage. However, there are many risks associated with buying a house jointly with your significant other, especially if you are not married.
There are many factors, both financial and economic, that couples need to consider before taking such a big step.
This article takes you through the information you need to know about buying a house together as unmarried couples, mortgage loans, and a few tips to help protect yourself in case of any fallout.
Can an Unmarried Couple Buy a House Together?
Yes! You can buy a house with your partner without being married. However, unlike married couples, you may want to spell out how much percentage of the house each of you holds.
You can own the home as sole ownership, joint tenancy, or tenancy in common.
Moreover, the terms of the mortgage may also vary. While few lenders allow the couples to apply for mortgages together, the others consider you and your partner as individual entities.
Joint Home Ownership: Married Couples vs Unmarried Couples
Joint ownership happens when more than one person holds the title to a property, in our case, a home. They enjoy equal rights.
Married or not, homeownership can be a decades-long obligation that should not be taken lightly. When done right, you end up with a home and good equity and credit score. But, on the other hand, you may also end up in a financial nightmare should something go wrong.
The most significant advantage is that you can easily afford a home (especially in the current economic situation) when there is someone else to shoulder the burden. With two incomes, you can easily save for a downpayment and also pay the monthly bills that come with a home.
There are a few disadvantages to owning a home along with a significant other. Firstly, you would be caught in a legal and financial crisis if your partner decides to walk away. You would have to shoulder the mortgage and bills alone until legal action is taken.
Buying a House as an Unmarried Couple
Buying a house along with your partner is a risky business. It is a major commitment that should not be taken lightly. You should take some extra steps to protect yourself.
Here is how you can buy a house as an unmarried couple in five simple steps:
Be Aware of the Risks
Buying a house as unmarried couples carries more risk than their married counterparts. The reason being, there are laws that stipulate the division of assets in the case of divorce or death, but the same does not exist for an unmarried couple.
The situation becomes even riskier when two people are on the deed but one person on the mortgage. In this case, if the partner fails to make payment, the partner on the deed can lose their home and any money they put into it.
Furthermore, it can be challenging to qualify for a mortgage.
The financial health of the couple is crucial for a mortgage application. So, you should sit together as a couple and be transparent about your finances, including credit card balances, student loans, car payments, etc., before making any decisions.
- Credit Score: The credit score, along with the information in the credit reports, play an essential part in getting the mortgage approved.
- Debts and Income: Debt-to-income ratio helps the lender decide on your financial stability. Lower the DTI, better your chances are of getting the loan.
- Expenses: Discuss with your partner how much he/she can put forward for the down payment, mortgage payments, closing costs, bills, etc.
In case both the partners apply for a mortgage together, they are equally responsible for the payment-so missing payments can affect the credit scores for both. So a better idea would be to save for 3-6 months’ worth of payments before you commit to buying a house.
Depending on the financial situation, you can either apply for a mortgage together or have one person’s name on the mortgage. The former is ideal if you and your partner have good credit scores, while the latter works if either one of you has a bad score.
In short, the partner with solid financials, credit score, and DTI gets better mortgage terms and mortgage interest rates.
Choose the Right Type of Ownership
One final thing you may want to come into an agreement on is the deed. The deed is a formal document that dictates the title of the home. You have three options when it comes to deeds:
- Sole ownership – Ownership is where one partner’s name appears in the title. It can be helpful when one person has poor financial standing. However, the person whose name is not on the deed does not have any legal rights and would have to address the same in a cohabitation agreement.
- Joint tenancy – Joint tenancy is when both the partners own an equal share in the home and are co-owners of the property. It ensures that you and your partner have equal rights to the home.
- Tenants in common – With tenants in common, the share is decided by how much each person is paying into the house.
You may want to consult with a real estate lawyer to find the best way to hold title for your situation.
Cohabitation Property Agreement
A cohabitation property agreement is essentially a contract that dictates what happens when the relationship breaks up. It protects the financial interests of both partners. This is something you need to discuss and come to an agreement with your partner.
The agreement includes:
- Share of the property
- Type of ownership
- Share of expenses
- Division of assets
- Buyout agreement
- Dispute process
Questions Unmarried Couples Should Ask Before Buying a House
According to a Coldwell Banker Real Estate survey, one in four unmarried couples between the ages of 18 and 34 buy a house together.
Despite that, unmarried couples have more to lose when their relationship comes to an end, especially when there is a house at play.
Since you are not treated the same as married couples, you need to ensure that you cover all your bases. So here are some important questions you may want to ask.
What Are the Laws for Unmarried Couples?
Law treats unmarried couples like individuals; hence it is up to the couples to decide how the home is handled in case of separation or death to mitigate the risks.
Prepare a cohabitation property agreement with the exit strategy, buyouts, how that property should be divided, etc.
Who Is Applying for the Mortgage?
The mortgage rates are dependent on the credit scores of both partners. So, if one person’s score is lesser, it will impact the interest rates. Hence it is best for the home loan to be on the person with a good credit score as well as DTI ratio.
What if One Partner’s Name Is Not on the Mortgage?
There isn’t much you can do if your name is not on the mortgage, but you can ensure that it is on the title of the house. However, the person who is on the mortgage is responsible for the payments.
How Will You Divide Ownership and Equity?
If the financial burden is divided evenly, the title and equity also follow the same path. However, it is not always the case. In this situation, the person who contributes the most financially has a better share.
Who Gets the House Post-Breakup?
Assets can complicate a breakup. For example, in the absence of a cohabitation property agreement, you can buy out the other partner’s share of the property, or both the partners can sell the house.
Sometimes the bank can also force the sale of the property. The same happens when one person dies. However, to take the partner’s name off the mortgage, you’d have to refinance it in your name.
How Will You Handle Household Repairs and Upgrades?
As much as this looks silly, you cannot know the compatibility as co-owners unless you address these questions. Again, these are better addressed in the cohabitation property agreement.
Things to Consider When Buying a House with Your Partner
There are a few key factors individuals may want to consider before buying a property as unmarried couples:
- Evaluate your relationship. Are you ready for buying a house together? What would happen if you break up?
- Ensure that you are buying a house for the right reasons.
- Who is applying for the mortgage? The person with a better income, credit score, debt to income ratio, and financial standing will qualify for better mortgage terms.
- Choose the ownership title that’s right for you. i.e., sole ownership or joint tenancy or tenancy in common
- Get a cohabitation property agreement. Ensure that you plan for every scenario.
- Determine how the costs such as property taxes, homeowner’s insurance, and HOA fees are split.
- Discuss the future plans before making any big decisions related to your home.
- Even if you live together, you cannot file your taxes jointly. You may have to either split what you have paid towards mortgage interest, property taxes, and mortgage insurance or let the person with the highest income take all the deductions.
Tools and Tips for Unmarried Home Buyers
- Keep track of your finances and maintain written records. Any cohabitation property agreement you may have is useless unless you have proof of who paid for what.
- Consult with a real estate lawyer and ensure that you have the proper protection in place in case of any breakup.
- Plan for worst-case scenarios. Ensure that you have a backup plan.
- Consider opening a joint bank account where both the owners contribute an equal sum every month.
Types of Mortgages for Unmarried Home Buyers
Any two or more people can buy a home together and not significant others. It can be friends, colleagues, business partners, or any other qualifying individuals. You and your partner can apply for any home loan: conventional, FHA, USDA, or VA.
- FHA – Considering a downpayment of just 3.5%, FHA seems to be the better option for most first-time home buyers. However, to qualify for the same, it should be the primary residence for both of you. With FHA, you need not have joint bank accounts. You also need not show proof of living together before applying for the mortgage.
- USDA – You may want to consider the USDA loan if your property is in a rural area. Eligible properties may even get 100% financing.
- VA – While VA allows an unmarried couple to apply for a loan, you may not get 100% financing.
- Conventional Loans – If you and your partner have a good credit score and a 20% down payment, consider a conventional mortgage.
How to Protect Yourself When Buying a House with Your Partner
What if the relationship doesn’t work out? What if the other partner dies?
When buying a home jointly, having both the partners’ names on the title is not enough to protect you. Here’s how you protect yourself and your investment in case of any separation or death.
Before you start house hunting as a couple, get your partner’s financial information including credit cards, student loans, and other debts. You may want to make sure he/she is ready to take on the financial burden that comes with owning a new home.
What kind of title you want? If your title says tenants in common, the house will not transfer to you on your partner’s death. To ensure that you both are protected, the title should read joint tenants or tenants with the right of survivorship. With either of these, the survivor will inherit the home along with the mortgage, and other expenses on the death of the other.
Consider having a cohabitation property agreement with your partner. It should cover the legal ramifications of eventualities like:
- What if you break up?
- What happens if one partner dies?
- How do you split the monthly payments and other bills?
- What if one person wants to sell the home?
Owning a home is always an investment that pays back a long period of time. It is gratifying when done correctly.
Buying a house is a long-term venture that requires a lot of time, care, and thought process before committing. You both should be able to view it as a financial endeavor rather than being an emotional one.
You should be willing to do the homework and research your part before jumping on the bandwagon. Ensure that you consult with professionals every step of the way. That way, you can avoid potential pitfalls and move forward. Ensure that you know what you are getting into, trust your significant other, and plan for the worst-case scenario.
Priority Lending, LLC has been providing mortgage loans and helping people like you fulfill their dreams since 1997. Contact one of our loan officers today to get started on refinancing your mortgage.