Sometimes unmarried couples want to buy a house together. Homeownership is a great goal, but before you take the plunge with your significant other, you need to cover some important legal and financial ground. Here’s what you need to know.
Open and transparent finances
If you’re thinking of buying a home with your significant other, the two of you should first have an open and honest conversation about your joint finances. If you don’t already know details about each other’s financial lives, it’s time to talk.
Share with one another how much you each earn. Also share how much you each have in savings and in debt. This last topic is especially important if either or both of you owe significant sums on student loans, car loans or other debt. Do you both have good credit history and scores, or does one of you have blemishes? Are you both diligent about putting money away in savings? Is one of you financially detail-oriented and the other not?
While you’re sharing this information, it’s also important to decide about bank accounts. Will you create joint bank accounts together, keep them separate, or share one joint account while maintaining your individual ones?
Once you have all the cards on the table, you’ll understand each other’s financial position, as well as your joint ability to buy a home. This conversation will also help you decide who is best suited to manage the household budget.
Applying for a mortgage
Mortgage underwriters consider a married couple to be one borrower. When an unmarried couple applies together, they are seen as two borrowers.
If you have good credit but your significant other has a lower score, it will affect the loan underwriter’s evaluation of your ability to buy the house together. The same is true when it comes to evaluating your individual financial assets, such as bank and investment accounts.
Ownership considerations with your partner
In addition to arranging for financing, you must decide how you and your significant other want to title the property — that is, how you will own the home you choose. This decision could affect mortgage approval if one partner has financial and credit blemishes.
You can own the property in just one partner’s name, in which case the partner with the best financial and credit profile should apply for the mortgage. Or you can jointly apply for the loan and both be listed on the property’s title as either “joint tenants” or “tenants in common.”
Under joint tenancy, the partners own equal portions of the property. If one partner dies, the other automatically inherits the deceased partner’s share. This right overrides any wills to the contrary.
With tenancy in common, each partner can designate someone else besides his or her co-owner to inherit their share should they die. Tenancy in common also allows you and your significant other to own unequal shares, a status that should be spelled out in writing.
Decisions to make with your significant other
Be aware that if you own a house with your significant other and the relationship dissolves, you will face tough legal and financial decisions. If both names are on the deed and mortgage, you are each an owner and each liable for the mortgage. If only one partner’s name is on the title and mortgage, but that partner depends on the other’s income to help make payments, the owner could face financial jeopardy if his or her significant other leaves the relationship. Likewise, if only one partner’s name is on the title, the other partner is in a potentially precarious position, because the owner could sell the house and keep the proceeds. This would leave the non-owning partner with no legal recourse and no enforceable claim to any part of the home’s equity.
If you own a home with your significant other, you’ll also face complications when you file your annual federal tax returns. When married homeowners file their taxes jointly, together they can claim all property tax and loan interest deductions. This often puts couples over the standard deduction, providing a break on taxes. But because unmarried couples file individual tax returns, they must split the taxes and paid interest on their respective forms. This amount might not be large enough to get either partner past the standard deduction, thus resulting in higher tax bills.
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