Instead of shopping for a sparkly engagement ring, today many couples in a committed relationship are in the market for something equally shiny and precious: the keys to a newly purchased home. A 2013 Marriage and Homebuying Study from Coldwell Banker Real Estate found that one in four couples between the ages of 18 and 34 bought a house together before they were married. That compares with 14 percent of those aged 45 and older.
One of the most compelling forces motivating this decision is our still-low mortgage rate environment. Other advantages include the ability to deduct mortgage interest from income taxes and the ability to build equity over time. Add in rising rental costs in some areas, and buying a house now rather than delaying home ownership makes sense for many unmarried couples.
While buying a house before marriage may make sense for many, it’s also one of the biggest, most complicated financial decisions a couple can make together, says Patrick Horning, a director of Advanced Planning at Northwestern Mutual. That is why Horning suggests that you carefully consider the logistics of entering into a mortgage before saying “I do” to make sure your finances are secure no matter what the future brings.
Look Before You Leap
“Married couples have a large body of law to protect their rights if their union dissolves. With unmarried partners, the law is less clear,” says Horning. “While no one goes into a relationship expecting the worst, it can be more difficult to break the co-ownership of a house than it is to get a divorce.” For this reason, Horning suggests that you consider the following five tips before meeting with a realtor.
1. Be transparent.
Before you buy a home with your significant other, have an honest discussion of your financial history. “It’s possible to get married without knowing how much your spouse earns or how much credit card debt he or she has. However, when it comes to qualifying for a mortgage, your salary, student loans, credit card debt, savings and more are all on the table,” says Horning. “Now is the time to come clean about any credit blemishes that could prevent you from obtaining the lowest rate on a home loan or other potential red flags that could derail the purchase.”
2. Get a prenup for your home.
Many unmarried couples think the standard real estate purchasing agreement is all they need when buying a home together. Not so, says Horning. “For most people, their home is the largest asset and largest debt. It’s crucial to have a legally binding agreement that protects each of you financially should something go wrong.”
A partnership agreement, sometimes referred to as a home-buying prenuptial, helps address issues such as who is contributing financially, how the mortgage will be paid, who pays for what, and what happens if you sell the house or the relationship dissolves. This way, any disputes can be settled without litigation or mediation. “The agreement also spells out what happens if one partner is unable or unwilling to meet his or her financial obligations,” explains Horning. “When unmarried couples enter into a financial contract such as a home purchase, both credit scores are impacted by the success of that joint purchase. A negative credit report can follow you even if your relationship ends.”
3. Understand your ownership options.
Many unmarried couples want to own the home “together,” but as Horning points out, you need to carefully consider your options before moving forward. “The manner in which the property is titled affects the way in which the property can be transferred and can have tax consequences later on,” says Horning. Keep in mind that each state has its own rules regarding titling of homeownership. For this reason, be sure to check your individual state’s laws regarding an unmarried couple buying a house together.
Generally, unmarried couples have three choices for taking title. One person can hold title as the sole owner, or both can hold title either as joint tenants or as tenants in common.
“Titling the property as joint tenants means you and your significant other own the property equally and each of you has the right to use the entire property. If one of you dies, the other automatically becomes the owner of the deceased owner’s share.”
Unmarried couples can also own a house as tenants in common, which means you and your partner should spell out what percentage of the property each of you holds. “Should one of you die, that person’s ownership interest passes to whoever is specified in a will or living trust,” explains Horning. “If you die without a will and you wanted your property to go to your partner, that won’t happen. Instead your intestate heirs (in other words, your next of kin) will inherit your share as governed by state law.”
It’s also possible there may be a situation in which it makes sense for one member of the couple to be the sole owner. “Having one name on the deed can make sense in certain instances—for example, when one partner has a poor credit history or one person is contributing the entire purchase price of the house,” says Horning. It’s important to know that if you do contribute to the cost of the home but aren’t listed on the title, you generally will not be able to deduct mortgage interest from your tax return.
4. Keep track of your finances.
Once you co-own a property with someone, it’s important to keep written records of who paid for what. “Let’s say you decide as a couple to finish the basement of your home. You earn more money so you provide the funds to make it happen. The understanding with your partner is that you expect to be repaid for half of the cost before you two split the proceeds from the sale of the house in the future. Any partnership agreement you may have will be useless unless you can prove who paid for what along the way,” says Horning.
5. Cover your bases.
No matter how you decide to purchase your home, if possible you should consult with a real estate or estate planning attorney to make sure you have the proper protection and agreements in place. “You’ll also want to touch base with your attorney over time to make sure the deed to your home reflects your current situation,” comments Horning. “You may decide to marry and/or have children. Your relationship may continue as is, or you may split and one partner moves out. If the situation isn’t properly handled, you may find yourself having to share the proceeds of your home sale long after the relationship has ended.”
Your home can be a shared joy; it also may be your biggest asset. Whether you marry or not, having a detailed plan for purchasing and maintaining that home can help ensure that you and your significant other are protected for as long as you and your mortgage last.
Information from Forbes.com