Many couples are buying a home together before tying the knot. In fact, one-in-four homeowners said they purchased a home with their significant other before marriage, according to a 2016 survey by TD Bank. Many even continue to live together without ever heading down the aisle. But getting a home loan as an unmarried couple can present some distinct financial challenges, and you, as an individual, need to take steps to protect your investment. Here, Realtor.com offers some of the most common mistakes unwed duos can make when buying a home together.
- Failing to discuss your credit history
Even if you’re applying for a loan together, you’re going to be assessed by the mortgage lender as individuals. Married couples are sized up individually, too, but since they’re wed, they likely already have had some in-depth money discussions. Unmarried couples may have put off this topic, but it’s time to ask each other some tough questions—starting with your credit score. Your credit score, of course, is primarily a measure of how well you’ve paid off past debts. Even if your credit score is superb, if your partner’s is subpar, you as a couple could be seen as a lending liability. Lenders often use the lower score of the two individuals when qualifying a couple for a loan. If someone’s score isn’t up to par, this could mean you’ll be required to make a higher down payment, get an unfavorable interest rate or not even qualify for a loan at all. One potential solution is to have only the person with better credit apply for the loan. However, in doing so, you’ll have to forfeit including your partner’s salary in your assets, which might weaken your application. The good news is, the sooner you know your partner’s credit history, the quicker you can fix any issues before they throw a wrench into your home-buying plans.
- Planning who pays what with a hug and a kiss
You can’t just assume you and your significant other are just automatically in sync about who pays what. This is particularly true if you’re unwed and lack the legal protections marriage provides. So, you’ll want to draw up a legally binding contract (with help from a real estate lawyer) that spells out what each person contributes to the down payment; how much equity each person has; and what each party will pay, including the mortgage, taxes, utilities and maintenance. Most importantly, the agreement should include a provision as to what happens in the event that you two are no longer together. For example, which party has the right to buy out the other one? And if that buyout happens, how many appraisals would you need to determine the property’s fair-market value? Spelling these things out now will help you avoid disagreements later.
- Not considering your title options
Sure, you may live in this home together, but there are actually three ways that couples can “own” a property. Here’s how to tell them apart and decide which way is right for you:
Sole owner: The only time you’d want to put just one person on the title is if that person will retain 100 percent equity of the property—which might make sense if that person is exclusively shouldering the mortgage and other costs with owning the home.
Joint tenants: If one person dies, the other automatically inherits his or her stake and owns the entire property.
Tenants in common: This stipulates that if one person dies, ownership will not automatically transfer to the other homeowner unless that person is named in the will. Instead, the deceased owner’s heirs will inherit those shares. This can be a good choice if one or both partners have kids or family from a previous marriage to whom they want to pass on the property.
- Making separate house payments
Although married home buyers often have joint bank accounts, many unmarried couples are hesitant to commingle their finances. That’s a valid concern, but if you’re paying a mortgage and other home expenses together, having a joint account—into which you both contribute money from your separate accounts—can help streamline your house payments immensely. After all, you can’t write two separate checks for your monthly mortgage, so having one account just makes sense (and setting up automatic payments ensures they’ll get paid).