Thinking of buying a house with your partner? Many unmarried couples decide to live together, often co-owning their homes. Here are some questions to consider if you’re thinking of making a similar commitment.
Will One Partner Take Out the Mortgage? Or Will You Be Co-Borrowers?
When unmarried couples apply for a mortgage, the partner with stronger credit may opt to be the sole buyer. This can lead to the best possible loan terms and rates.
Alternatively, the couple can apply for a mortgage in both names and pay it off from a joint bank account. Buying a home together, as co-borrowers, may seem to strengthen the couple’s borrowing power. Yet it can do the opposite. A lender will look at the lower of the two credit scores to make approval decisions.
Moreover, co-borrowers need to refinance the loan if they later stop co-owning and put the title into only one of their names. Handling a home loan jointly can complicate the couple’s future if the relationship changes.
☛ Before applying for your mortgage, get the facts on credit scores — and how to boost yours.
How Will Your Home’s Title Be Vested?
One day, even if a couple stays together for life, the house will be conveyed to future owners. That’s why vesting the title is so important for every homeowner. Here are your key titling options:
Sole Ownership
You might be asking: If we’re going to live together, why would we put the title in one of our names only? It’s not unusual for one partner — typically the one with the stronger financial profile — to qualify for the mortgage and buy the house, while the other pays a monthly, rent-like contribution to the mortgage. There are additional reasons a couple might vest the title in one partner’s name:
- Perhaps one of your careers carries special risks of personal liability. Then you may opt to shield the value of the home by buying it in the other partner’s name.
- Some couples title the home under one name to diversify their credit power — so both don’t have credit issues at the same time in case of a mortgage default.
- And some couples put their first house in one name and the second (a vacation home or investment property) under the other’s name.
As we’ve noted, if one of the partners has better credit, buying the home in that partner’s name may seem like the obvious way to proceed. Yet even when partners have markedly different financial resources and credit profiles, some co-own and co-borrow on the mortgage loan, and then compensate for their differences. Perhaps the co-owner with the higher income will contribute the earnest money and down payment, for example.
So, let’s turn to the to main forms of joint ownership for unmarried couples: rights of survivorship, and tenancies in common.
Joint Tenancy With Rights of Survivorship
When one co-owner passes away, should that partner’s interest in the house automatically vest in the other? With the JTWROS vesting, it will, because the partners co-own the entire property — they share the whole pie rather than own a piece of it.
Among couples who live together, survivorship rights are very popular. This way, when one partner dies there is no question who gets that person’s homeownership interest. The surviving partner automatically becomes the sole owner. Some couples use this vesting method to avoid potential probate challenges from relatives.
Tenancy in Common
Here, the partners hold shares in the title individually. Each may opt to transfer their own piece of the pie to anyone else. The two people can own the home 50-50%, 80-20%, or by some other percentage.
Do the partners both want to designate their own beneficiaries to receive their interests in their home? If so, they can vest the title as tenants in common. See more here about how the tenancy in common works, and why an unmarried couple might choose it.
In the default tenancy in common scenario, the percentage owned by the deceased partner goes to recipients named in that person’s will. Yet during probate, the survivor might wind up buying out the late partner’s share or selling the home to transfer the beneficiaries’ share of the value to them.
☛ As you can see, vesting your home matters as much as creating your will.
Why Should You Have a Non-Marital Cohabitation Agreement?
When two people live together, they assume the relationship will last. It’s best to plan for the unexpected anyway. Where there’s a marriage or a civil union, there’s a legal pathway for dissolving the relationship. Most unmarried couples don’t have the same legal protections for the value each partner builds up in a home.
If you separate in the future, then, how will you agree on splitting up the property you’ve shared over time? Prepare by creating a cohabitation contract that fits your personal circumstances. While break-up scenarios aren’t romantic to consider, if you’re in the position to buy a home, you’ll need to be able to have the discussion together.
Even if you never need it, a legal agreement will make the terms of co-ownership easier to understand and carry out. So, take time to consult with a local attorney who regularly handles such agreements. You and your partner need to be ready to answer these questions:
How Are Your Ownership Interests Shared?
Are both names going on the title? If so, how will you vest your ownership interests? If you co-own, your lender will want you both on the mortgage, and may have important input when you decide how much equity you’ll each own, and how much of the mortgage payment you will each handle. And how are you dividing the purchase costs? For example, will one of you cover the closing costs while the other pays the earnest money and down payment?
☛ First-time home buyer? This checklist of steps and services in the home purchase can help you start planning your and your co-buyers’ roles.
How Will You Share Home Upkeep and Expenses?
Write this into your plan. Include utilities, exterior and interior upkeep, cable and wireless services, title insurance, homeowners’ insurance, property taxes, and any applicable condo fees or assessments. Establish a record of what you each put into the home. Keep the document file with your legal agreement. A regularly updated agreement can protect a partner who contributes to upkeep but is not named on the title.
In addition to being fair, be practical. For example, the person who will keep the home in the event of a split might be the sole borrower and the one who pays for home upgrades, while the other make rent-like payments. The non-borrower might pay for interior décor and furnishings as these can be taken out of the house if the two go their separate ways.
Who Keeps the Home in the Case of a Separation?
If you co-own, will the house be sold? How will the equity (including home maintenance work contributed by either party) be divided up? Your agreement may empower either of you to force a sale and pay the proper percentage of the home’s market value to the other partner.
Why is this necessary? Consider a common situation. The partners are co-owners and co-borrowers. One keeps the house but both are responsible for the mortgage. What if the one staying won’t agree to buy the other one out? The one who moves out could face long-term stress and uncertainty, hoping the person who stays in the home can (and will) keep paying off the loan.
What Is Your Lifetime Plan for the House?
After marriage, if you go that route — or at any point — you can have the deed transferred to both of you as joint owners. There are several ways to do this, such as using a quitclaim deed to transfer your interest from your sole name to both names: yours, and your partner’s.
Before carrying out future deed changes, let your mortgage servicer know what you are doing. Notify your insurance company before making any title changes, allowing the company to make any needed updates. It’s also good to plan ahead for your tax returns. Though your taxes should be handled just the way they would if you were married filing separately, communicating your plans to your tax expert ahead of time is still wise. Tax laws change often, and there are tax benefits at various stages of homeownership. You’ll want to hear any advice an expert can offer before signing purchase or cohabitation agreements.
Consider too what terms you’ll want to follow if you and your partner sell the home later on. How should the property value be redistributed if you sell, or if one of you passes on? If the home is jointly owned without rights of survivorship, how are the owners passing their share after death — through a will or trust? Speak with an experienced attorney in your state whenever you need case-specific advice about making changes to your ownership and your estate.
☛ And what about the loan? Learn what happens if a mortgage borrower dies before paying off the mortgage.
Married or Not, It’s Best to Plan for Contingencies
We offer this article for informational purposes, as a service for our readers. It is not intended to serve as legal advice or opinion. Cohabitation involves a host of situation- and location-specific questions.
And of course, even the best laid plans and legal instruments can’t anticipate every possible turn of events. But avoiding risks at all costs can mean missing out on some of life’s most enriching experiences. Happiness may be the result of good preparation. And trust may be based on the mutual acceptance of some level of risk in life.
Supporting References
Ashley Kilroy for RocketMortgage.com: 5 Questions Unmarried Couples Should Ask Before Buying a House (May 21, 2021).
Photo credits: Natik_1123, via Pixabay, and In Lieu and View, via Unsplash.