Couples who want to buy a home together before marriage or without marriage plans enter the process with excitement over the prospect of ditching rent and becoming home owners. They face the same process as anyone deciding on location, price range, affordability, and style of home. But when it comes to actually living in the house, who pays the mortgage, how are maintenance costs divided, and how are funds saved for such costs? And of course, what happens if the couple splits? For married couples, there are clear laws to protect the rights of each party with respect to the house. The law is not so clear for unmarried couples owning a home if they break up.
Planning Home Ownership as an Unmarried Couple
Financial issues are one of the leading causes for relationship troubles, whether a couple is married or not. Although the discussion of finances is not romantic, it’s something that needs to be carefully planned for unmarried couples who purchase a home.
Transparency. If your partner doesn’t know your salary or something in your credit history that could affect your interest rate, now is the time to come clean. It will all be laid out on the table anyway if you’re both applying for the mortgage. Salary, existing debt from student loans and credit cards, and credit scores are all made transparent as part of the loan qualification process.
Fees. Couples need to decide how they’ll cover all associated costs with buying a home. One person may have more to contribute to the down payment than the other or may be able to pay a larger percent of the mortgage than the other. Will that person recoup his or her larger contribution should the relationship end? There are other costs to consider such as property taxes, insurance, and PMI (private mortgage insurance) that either need to be split equally or in a way that both parties agree to prior to buying.
Maintenance and repair costs. Homes need regular maintenance like lawn cutting, gutter cleaning, painting, and a wide range of other things that require investment of money and time. If the furnace breaks down, the fridge goes out, or the washing machine couldn’t complete its last load, the home owners are responsible for repairs. Couples need to decide how they’ll divide their time and save for such expenses. And again, will the contribution be equal or will someone pay more than the other?
Consider Opening a Joint Bank Account
Opening a joint bank account for ongoing maintenance and repair is the most prudent solution to saving up for both expected and unexpected expenses. If both parties contribute equally to this account with automated deposits, there’s less chance for arguing who pays for what when money for the home is needed. Of course, this assumes that there is solid trust between the couple that the money is only used for its established purpose.
Title Options
The way a property is titled affects how it can be transferred in the future and its tax consequences. Unmarried couples must be informed of their options and choose the one that best suits their circumstances. In general, there are three options: one can hold title as the sole owner or both can hold title either as “joint tenants” or “tenants in common.”
Sole owner. This is the least common option as most couples choose to have both parties on the title. But, it’s possible that one person has the money to purchase and pay for the mortgage on his or her own and will assume all financial responsibility on the home.
Joint tenancy with rights of survivorship. This option means that each partner owns the home equally, 50/50. Should one die, the other will get her full share of the property. There is no opportunity to leave one’s share to a relative or heir.
Tenants in common. This arrangement allows couples to determine what percent each person owns, 50/50, 60/40, etc. If one dies, his share may go to a relative or heir through a will or probate process.
What Might Happen if You Break Up?
No one goes into a relationship expecting it to end, but obviously it’s a possibility and one that needs to be considered with such a major purchase. If you break up, consider these questions:
∙ Who gets to stay in the home?
∙ Can one person afford to stay in the home or must it be sold?
∙ Will one party purchase the home from the other?
∙ What if you want to sell and your partner doesn’t?
∙ How will you choose the Realtor® who sells the home?
These are issues that could bring about legal arguments and make for a very unpleasant ending.
Plan Ahead with a Home Buying Prenup
Arguing over any of the above points is an entanglement that can be avoided by planning ahead with a real estate attorney who creates a “home buying prenup,” also known as a “partnership agreement.” This legally binding document can address issues regarding how the mortgage, maintenance, and expenses are paid, as well as what happens to the house if the relationship ends. Also, decisions can be made ahead of time as to what happens if one party cannot meet his or her financial obligation. With this document, disputes can be settled without litigation or mediation.
Realize that when you enter a financial contract, such as a home purchase, as an unmarried couple, both credit scores are impacted by the success or failure of that joint purchase. A negative credit report can take years to repair, even long after a relationship ends.
A shared home can be a great source of happiness and comfort. Take the necessary steps from a financial standpoint to go into home ownership with well-planned steps for expenses and the protection of interests in the event of a dissolved relationship.