The United States Federal Reserve just lowered interest rates for the first time in a decade. Mortgage rates are still hovering near record lows with the 30-year average at 3.75%.
At the same time, home prices continue to rise across the nation. Home prices on the West Coast have nearly doubled in the past seven years.
These trends are pressuring unmarried couples to buy. Rising home prices tend to limit a couple’s purchasing power. At the same time, buyers need to strike while interest rates are still low.
Read on to learn tips for unmarried couples buying a house. Explore how you and a significant other should plan, budget, and execute a house transaction before saying “I do.”
Is It Common for Unmarried Couples to Buy a House?
Many unmarried couples buying a house question their decision. They wonder if it is a good idea to enter into a long-term commitment first before walking down the aisle.
The truth is that fewer couples are getting married each year. Approximately 500,000 fewer weddings occur each year from the 1980s peak.
The marriage rate is also at its lowest point in 150 years. Experts suspect a number of reasons from a decline in religious participation to negative economic conditions.
The bottom line is that Americans no longer view marriage as a necessity. There are roughly 18 million unmarried couples sharing a residence. You do not need to be married to invest in the housing market.
What Is Your Partner’s Credit Score?
Before issuing a loan, every lender runs your credit score to see if you are creditworthy. During the pre-approval process, ask to see a copy of your future roommate’s credit report. The last thing you need is to enter the largest investment of your life with a shaky partner.
There are a couple of things to verify about your partner before signing a mortgage. First, make sure they always make on-time payments.
Next, evaluate their outstanding debt. It is important that they are not overwhelmed by credit card and auto loans.
The pre-approval process is certain to shed light on each person’s creditworthiness. However, a personal review of the credit report ensures there are no secrets between partners.
This step may be unnecessary if the couple has been in a rental agreement together. There is likely no issue if your partner paid their portion of the rent and utilities each month.
Do You Have a Joint Account?
The next step in the process is opening a joint account. This is an effective way to make sure there is money in the account for the mortgage, taxes, and other home expenses.
Unmarried couples buying a house use a joint account for payments. They direct a portion of their weekly or biweekly payment to this account.
A joint account establishes financial transparency between both parties. Both people have access to the account meaning they can make sure adequate resources are there. This eliminates many questions about whether each person is contributing their fair share.
Did You Establish a Joint Budget?
Now that you have a joint account, it is time to establish a budget together. The first step is determining how much money you bring in jointly.
Start off with a review of each other’s W-2 or 1099-MISC form from the prior calendar year. Then, see how much take-home pay that you collectively earn.
It is important to remember that gross salary is misleading. It does not account for payroll deductions like taxes or retirement savings.
With take-home pay determined, you can now turn your attention towards expenses. Subtract all fixed and variable expenses from your collective income. The remaining amount is how much money you have available for the mortgage, property taxes, and home insurance.
Are You Tracking Costs?
The mortgage is not the only cost involved with homeownership. Your monthly payment will also include property taxes and home owner’s insurance.
In addition, there are various other costs to operate and maintain the house like utilities. Some homes also require expensive improvements like roofing or appliances.
One tip for unmarried couples is to reach a complete cost-sharing agreement. It is not truly a 50:50 split if you cut the mortgage in half, but leave your partner with all of the utilities. A fair agreement considers all homeownership costs and allocates them according to ownership percentage.
Who Is On the Title?
The title determines who the legal owner of the property is. Regardless of financial contribution, a title in one person’s name is not dual ownership. For unmarried couples buying a house together, the solution is to take title as tenants in common.
Ownership for tenants in common does not have to be equally distributed. Ownership percentage can be allocated however the couple deems appropriate.
In the event of an untimely death, an owner’s shares are reissued to the other owner. There is a potential for legal landmines with this type of arrangement. For this reason, it is important for unmarried couples to complete legal documentation prior to closing.
How Does the Law View Unmarried Couples Buying a House?
The laws governing homeownership and marriage are well-known. If your married partner passes away, homeownership unquestionably falls to the surviving partner. When a married couple separates, the divorce court decides the fate of the home, based on various factors.
For unmarried couples, the law is not so straightforward. While each state has different laws, in general, unmarried couples are viewed as individuals. This fact presents serious legal complications in the event of a death or separation.
What Are the Legal Complications?
Due to the reasons outlined above, unmarried couples buying a house are legally vulnerable. Homeownership gets complicated under certain circumstances, especially if there are children involved.
This leaves many partners wondering how they can protect themselves in the event of a split. The simple answer is to hire a legal professional to help you draft a cohabitation property agreement.
This legal document lays out the responsibilities of each party. It also breaks down what happens in certain unfavorable situations.
For example, what happens to the property if the couple decides to split? What happens if one person is not able to meet their financial obligation under the property agreement?
A cohabitation property agreement also covers the dispute process and buyouts. There are instances in which one party seeks to buy the other’s shares and take complete ownership.
You are correct to think the above issues are complicated. It is highly recommended for unmarried couples to complete a cohabitation property agreement.
How Are Federal and State Income Taxes Handled?
There are numerous tax benefits to homeownership. For example, state and local tax (SALT) is a popular federal deduction for homeowners.
In addition, mortgage holders can write off interest expenses each year. Some closing costs are deductible as well, giving buyers immediate tax benefits. Many states also write incentives for property ownership into the tax code.
In a marriage, many couples file jointly and receive these benefits together. How do unmarried couples buying a house split the tax benefits?
The answer is that it depends on the title and any legal documentation. If only one person is on the title, the tax benefits belong to them. It gets more complicated for tenants-in-common. This is a source of potential tension if the couple does not have a legal agreement in place.
What Happens If Only One Person Is on the Mortgage?
There are cases in which only one person is on the mortgage. This is common when one partner has large sums of debt or a lower than ideal credit score. Because debt-to-income ratios directly affect how much home you qualify for, and low credit scores can mean higher interest rates, their inclusion on the mortgage may not be ideal.
There are a few different ways to resolve this situation amicably, the easiest way is to put the left-out partner on title.
This now defaults to a tenants-in-common situation and is the best way to protect the legal rights of the person not on the mortgage.
A cohabitation property agreement is another mechanism to consider. Here, you can define why a partner was left off the mortgage. A lawyer can also layout this person’s ownership stake and other responsibilities.
A Recap for Unmarried Couples Buying a House
You do not need to be married to buy a house and, in fact, Americans are increasingly rejecting the institution of marriage.
There is no reason for unmarried couples to be shut-out from the financial benefits of homeownership. A legal certificate does not preclude you from taking tax benefits and building home equity.
Working with your mortgage loan officer will help alleviate many of your concerns. The majority of legal risk is addressed with the title and a cohabitation property agreement. If you belong to the group of unmarried couples buying a house, contact us and discover which mortgage option is right for you and your partner.