Whether out of romantic desire or economic sensibility, it is becoming increasingly common for couples to purchase or consider purchasing a home together before (or without) getting married. Particularly as millennials are entering the home-buying market, perspectives about home ownership have been shifting. In a recent study of young homeowners between the ages of 18 and 34, one in four couples purchased a home together before getting married. One poll found that 40% of millennials think it’s a good idea for a couple to buy a home together before marriage, and that thirty-seven percent think the purchase should actually take place before the wedding.[i]
With low interest rates and a housing market reminiscent of pre-recession days adding a sense of urgency to the mix, it’s important to be aware of the differences between buying a home as a married couple and a buying a home with a someone that is not (or not yet) your legal spouse.
Why does it matter if you’re married or not? There are significant implications from a legal, financial and risk standpoint. It impacts the title and taxes, your credit, estate planning and what happens if you were to separate, to name a few.
Buying a home is a significant and complicated financial commitment (and an exciting one too, of course!). With the best of intentions, it is important to ensure each of your best interests and well-being in the decision-making process and, once papers are signed, in the event that your circumstances were to change. As unromantic as it may seem, there are a number of critical decisions and agreements that should be documented before entering into this kind of financial commitment.
If you’re looking to buy before getting married, I have four recommendations to help set you up for successful home co-ownership:
1. Open a joint bank account
You’ll need this to get pre-approved to co-sign on a loan anyway, but using a joint account to pay your mortgage, property taxes, insurance, and maintenance is a great way to keep things hassle-free. Even if you keep separate bank accounts, each of you can set up automatic monthly deposits into the account, and set up autopay for the monthly mortgage payment as well. This is an easy way for both of you to track and manage your home-related finances.
2. Decide an amount you’re comfortable with
You’ll likely get pre-approved for a much bigger loan than you expect, but that doesn’t mean it’s a good idea to bump up your budget. Be careful not to stretch your combined budget too far. Generally speaking, I recommend a monthly mortgage payment that’s no more than 40% of your net monthly income (not gross monthly income, as your pre-approval amount is probably based on). For contingency planning, consider if you had to pay the mortgage with only one of your incomes. Knowing you can still afford the monthly payments with one income can greatly reduce the stress and pressure of unexpected events.
3. Decide how you’d like to purchase a home as an unmarried couple
You and your partner must decide how you will own the home, or “take title”. There are three ways to purchase a home as an unmarried couple:
Have one person hold the title to the house as the sole owner (other person acts as a renter)
Both of you hold title as ‘joint tenants’ (you share equal ownership)
Both of you hold title as ‘tenants in common’ (you can specify ownership percentages)
Each of these options has its own unique financial and legal implications. Considerations such as relative income, credit scores, estate planning and personal finances should be taken into account when choosing the approach that works best for you. If you co-sign on a mortgage, you are both 100% liable for the debt, meaning if your significant other stops paying his/her share, you will still assume the entire debt obligation. Typically, you would want both parties to hold title, so that you both gain equity in the investment (if you go this route, be sure to read #4 about written contracts). How you want to own the house (including how you decide to split the down payment and monthly mortgage payments) can help determine if joint tenants or tenants in common is right for you. Joint tenants will own the house 50/50. Tenants in common can make different agreements, such as a 60/40 split.
4. Put your agreement in writing
Regardless of the type of your ownership agreement, you should have a real estate lawyer prepare a written document that clearly outlines the full details of your arrangement. This should include what percentage of the home’s equity each partner is entitled to, especially if you have decided to contribute different amounts to the down payment or mortgage payments, and what will happen to the property if you decide to separate or if one party can’t pay. While you hope you never need them, it’s important that you and your partner iron out these details from the start, and have a written contract outlining your desires for the property’s division in the event that your circumstances change or your relationship comes to an end. Both of you will appreciate having one less thing to worry about should a division of the property be necessary since the rules were spelled out and agreed to during more amicable times.
If you’re thinking about buying a house (married or not), let me know and we can work together to put you and your partner in the best possible place for mutual success.