You’re not married, however, are you and your partner considering buying a home together? It’s happening more often. The 2019 Home Buyers and Sellers Generational Trends Report from the National Association of Realtors showed that 8% of recent home buyers were unmarried couples. Maybe you’re buying a new home before walking down the aisle or maybe marriage is nowhere in your future. Either way, there is unique advice that applies to unmarried couples buying a house. Here are a few things you need to consider when you’re planning to cohabitate.
How Credit Scores Are Evaluated
When couples, whether married or unmarried, apply for a mortgage on a new home, their credit scores are assessed individually, therefore, there is no benefit if one partner has a strong credit score and one partner has sub-par credit. Both parties should work on improving low credit scores before you move forward with buying a new home.
Both married and unmarried couples can apply for a mortgage together. For the purposes of determining rate & eligibility, both situations are treated the same. When both credit scores are favorable, the couple can choose to apply for the mortgage under one name or both. If only one individual will be on the mortgage, only that person’s income can be reported on the application and that individual’s credit score is used to qualify for the loan, however, both individuals may be listed on the property deed itself.
Regardless of whether a couple is married or unmarried, if their credit scores fall in the “fair” or “poor” range, then if the application is approved, the mortgage will require a larger down payment on the home and will result in a higher interest rate on the loan.
A New Home “Pre-Nup” Agreement
There are laws that protect married couples and oversee the division of their assets if they separate or one spouse passes away. However, these issues are not as clear cut for co-habitation. For example, who gets the house when an unmarried couple splits up? We suggest a property agreement for unmarried couples, a legally-binding document that outlines how you will proceed with homeownership as a couple.
A real estate lawyer can help you create the official legal document that formally lays out both parties’ financial responsibility for the new home. For example:
- How much will each individual contribute to the down payment?
- How much will each party put towards monthly mortgage payments, taxes, utilities, and home repair?
Your document should also address worst-case scenarios including a possible break-up of the relationship or the death of one partner. You should determine what percentage of the home each individual owns, and how you will handle a buyout or other exit strategies.
Whose Name Goes Where?
As mentioned above, both or just one individual can apply for a mortgage, depending on their credit scores. In some cases, couples make the decision to have one person apply for the mortgage, but they list both people on the home title.
It’s important, however, that you make this distinction — whoever is listed on the mortgage is legally responsible for paying for the house, while whoever is listed on the title is a legal owner of the house. If a partner is listed on the title, but not on the mortgage, they are being handed half a house. They have all the rights of ownership but with no financial responsibility.
The only way to remove someone from the mortgage is to go through the refinance process. The only way to remove someone from the title is to buy out their ownership in the home or to sell the home outright.
Different Types of Ownership
You will also need to determine how you and your partner will classify the ownership of your home. There are several types of ownership you can explore:
- Sole Ownership — This is best when only one party is listed on the mortgage. They are shouldering all the financial burden, so they receive all the rights of ownership. If the owner passes away, ownership is passed on through their estate to whoever they have listed as the beneficiary.
- Joint Tenancy — This type of ownership works best when financial responsibility is split 50/50. If one person dies, the ownership and responsibilities transfer to the other owner.
- Tenant in Common — This form of ownership recognizes ownership of different percentages of the property. For example, one party covers 70% of the mortgage payment, while the other party contributes only 30%. If an owner dies, their percentage of ownership goes to whomever they name in their will. It may be the other owner, but it could also be a family member (parent, sibling, or child).
At Tax Time
When you’re unmarried, even if you live together, you cannot file your taxes jointly, so you’ll need to decide how to handle home-related deductions on your income taxes.
When you take itemized deductions on your taxes, you can deduct what you’ve paid towards property taxes, mortgage interest, and mortgage insurance. Deductions allow you to lower your taxable income and, ultimately, what you’ll owe in taxes.
If you and your partner own your property jointly, you can each deduct the actual amount of mortgage interest or property taxes that you’ve paid. Another option is to allow the individual with the highest income to take all the deductions, which would provide the biggest decrease in taxable income. While it only benefits one person’s tax return, it may also benefit your overall finances as a couple.
Don’t Lose Sight
Buying a home as an unmarried couple can be trickier than buying a home as a married couple or a single person. “When buying a home with your significant other, whether it be a spouse, fiancé or boyfriend/girlfriend, it’s not uncommon for one partner to have a credit score lower than the other partner. If that is the case, don’t worry. Sometimes we can make a mortgage work in just one person’s name. If we can’t do so, we can still provide some guidance on the steps you need to take in order to qualify for a home of your own together,” adds Ben Huard, Sr. Real Estate Originator at Diamond Credit Union.