Finding the perfect home is an exciting milestone for any couple. Traditionally, people used to get married before making major financial decisions together. However, times have changed. According to a survey conducted by Coldwell Banker Real Estate, one in four unmarried couples between the ages of 18 and 34 now buy homes together. This shift reflects the evolving dynamics of modern relationships.
While there are numerous compelling reasons for unmarried individuals to buy a house together, it’s important to be aware of the potential risks. Without proper knowledge, purchasing a home with your partner can become a costly mistake. In this article, we will explore some essential considerations to keep in mind when venturing into the realm of joint homeownership.
Getting Finances in Order
Before embarking on your house-hunting journey, it is crucial to openly discuss and exchange personal finance information with your partner. This includes details such as salaries, debt, and credit scores. Not only will this information help you estimate the affordability of a home, but it will also determine each person’s ability to contribute towards the down payment, closing costs, and monthly mortgage payments.
In addition, it is important to assess your partner’s credit score early on. A low credit score can potentially reduce the amount banks are willing to lend, leading to less favorable rates and terms. Furthermore, if your partner ever stops contributing to the mortgage, as a co-signer, you may be held liable for the entire payment. It is prudent to ensure that you can comfortably handle the mortgage payments on your own, if needed.
Deciding on Ownership
Once you and your partner have a budget in place, it’s essential to consider how you will “take title” or own the home together. There are three basic options to explore:
Sole ownership: This option involves one person holding the title as the sole owner. While this may initially seem like an unfavorable choice for unmarried couples, certain circumstances may make it necessary. For example, if one partner’s credit score is too low to qualify for a mortgage, or if a higher-income partner wishes to maximize house-related tax deductions. However, before proceeding with this option, it is crucial to consult an experienced real estate lawyer to understand the potential ramifications.
Joint tenancy: Joint tenancy is suitable when partners wish to own equal shares of the property. This arrangement provides the benefit of requiring both owners’ consent for any potential sale of the home. In the event of one partner’s death, the surviving partner automatically inherits their share, regardless of any conflicting wills.
Tenants in common: This is the most common option for unmarried couples. It allows for unequal ownership shares and provides flexibility in terms of passing on shares to chosen individuals upon death. It is important to document the ownership percentages in a legal agreement to avoid potential disputes in the future. Seeking guidance from a real estate attorney is recommended when considering this option.
Important Questions to Address
Before taking the leap into joint homeownership, there are some important questions to address as a couple:
What are the laws in your state? Understanding the legal aspects of buying a home with your partner is crucial. Each state has different regulations that govern these types of arrangements.
What documents should be in place? It is advisable to draw up a cohabitation agreement that outlines ownership details and an exit strategy, if necessary.
Who should be on the mortgage? Depending on credit scores and income disparities, it may make more sense for one partner to obtain the mortgage. This consideration can impact your homebuying plans.
What happens in the event of a breakup? While it may be an uncomfortable topic, it is essential to discuss potential scenarios and how assets would be divided if the relationship were to end.
What happens if someone passes away? Planning for the worst-case scenario is necessary. Understanding the implications and proper documentation in case of death is crucial.
How will costs be split? Owning a home comes with various expenses like maintenance and property tax. It is important to have open discussions regarding cost-sharing and consider setting up a joint bank account specifically for home-related expenses.
When buying a home with a partner, it is important to consider the impact of differing credit scores. In some cases, it may be advantageous for one partner with a stronger credit score to apply for the mortgage alone. This can lead to better mortgage rates and reduce overall expenses for the household. However, if both partners have similar credit scores, applying together is a viable option. It’s important to keep in mind that both credit scores will be taken into account.
The Risks and Rewards
Buying a house with an unmarried partner can be a rewarding experience, but it is not without risks. While some relationships stand the test of time and enjoy long-term happiness as homeowners, there are potential legal and emotional risks to consider. Without the legal safeguards that come with marriage, the division of assets in the event of a breakup can become complex and emotionally challenging.
To safeguard your interests, a cohabitation agreement is highly recommended. This legally binding contract sets out the terms and conditions of living together and provides a clear framework for financial and legal rights. It covers aspects such as property division, inheritance, financial expectations, and exit strategies. When buying a home together, the agreement should also specify the type and ownership shares of the property.
Buying a house with your partner before marriage is an important decision that requires careful consideration. While there are risks involved, joint homeownership can be a fulfilling and financially advantageous option. By discussing crucial topics, understanding the legal implications, and seeking guidance from professionals, you can navigate the complexities of buying a home together and embark on this exciting journey as a united team.