Cover your ASSets. What unmarried couples need to know before buying a house together.
Over the last decade or so, it has become more common for couples to merge finances, start families, and pursue joint homeownership before choosing to be married. Owning a home with another person to whom you are not legally married, whether that person is a significant other, friend, or family member certainly has some advantages. The most basic advantage is a simple fact it’s always easier to afford a big, expensive thing with another person than to pay for something on your own. So, the temptation to go into joint ownership, even when you might not be ready for marriage, is a significant one.
Before you decide to buy a property together, it is important to understand your relationship dynamics and how the long-term legal and financial obligations of homeownership will affect you both. Having a mutual understanding of the financial logistics and shared expectations is the best thing you can do for you and your relationship. Ideally, in the form of a legal property agreement. If 2020 has taught us anything, it’s that life can surprise you and unfold in many ways.
Perhaps the largest overlooked issue when buying a house as an unmarried couple, is how it can create an offset in the balance of power in your personal relationship.
Be sure to explore these questions, because it can be incredibly challenging to navigate once you’re in the thick of it.
- Does one earn more than the other, making either of you unable to pay half of the expenses?
- Is one always on time with expenses and the other often late?
- Is one better at sticking to a budget, while the other spends more?
- Do you have different ideas on how to manage money?
Like any shared responsibility, it tends to work best when both partners contribute the same resources equally. However, contributions between partners don’t necessarily have to be apple-to-apple in order to be equal. Many couples only consider the value of alternative contributions when or if the relationship starts to fall apart. These contributions can look very different from couple to couple. For instance, it is not uncommon for partners (married or otherwise) to have a significant difference in their respective incomes. Contributions may be in the form of resources that don’t necessarily have an easily defined dollar-value. Family caregiving, gifted business opportunities, and providing expensive healthcare care coverage through workplace benefits are just some examples of valuable contributions. Know their worth.
Important Questions to Ask
Whether you are buying a home with your partner, or you are just contributing financially toward a home your partner owns without you, establish expectations of how the following will be handled:
- Who will apply for/ be on the mortgage?
- How shall ownership be split (50/50, 60/40)?
- How will the property be titled to protect both parties?
- How with the household costs be split? Evenly or by percentage?
- Up-Front fees?
- Monthly costs?
- Repairs and improvements?
- What happens if one wants out, needs out, or if one of you dies?
- Will you both keep separate bank accounts and set up a direct deposit for the mortgage payments?
- Who will be responsible for paying/managing utilities?
Your Approach Matters
Of course, joining finances with another person, whether married or not, is no small thing. When you apply for a mortgage, it’s important to note that unmarried persons apply for mortgage financing as individuals, regardless of relationship status. In contrast, married couples can apply for a mortgage as a unit. Depending on the strength of your respective credit scores, it may be more strategic for one person to be on the mortgage over the other. This is because the person with the stronger credit can “purchase” the home and receive a more favorable interest rate. While tax laws are subject to change every year, as of now, if a married couple buys a house and files taxes together, there are tax benefits available. But, if two unmarried people buy a house together, only one will benefit from that tax break. This is where the advice from tax and financial professionals come in handy.
When you buy a home together before marriage, you leave yourself vulnerable to what will happen if the other person decides to walk away. The legal action necessary to hold the other person accountable for their share of the mortgage is not cheap. And more than likely, you’ll be stuck paying 100% of the utilities and other expenses in the meantime.
The costs don’t end with the purchase price. Don’t forget:
- regular maintenance costs
- repairs and remodeling expenses
- replacement of appliances
- taxes
- insurance
- possibly homeowner’s association fees
- potential settlement/ reimbursement payments to the other partner if one does walk away.
A Morbid Reality
Most people don’t properly consider what will happen when they die. When purchasing a house together (especially when you are unmarried) simply putting both names on the title is not enough to protect the survivor should one of you die. Both names on the title make you “tenants in common” Which means ownership does not automatically transfer to the other person upon death. This can be tricky should your partner pass away, and you find yourself knee-deep in legal matters regarding the home you bought, lived in, and worked hard to pay for. To protect both your interests in the property, ask your attorney about becoming “joint tenants” or “tenants with right of survivorship.” In these forms of ownership, the survivor will automatically inherit the property upon the other’s death. This can be potentially problematic if the surviving partner isn’t financially prepared to inherit the mortgage and all the associated home expenses on their own. One way to prepare for this situation is to have a life insurance policy that will cover the loss of income of the deceased partner.
The Solution: Get yourself a Legal Property Agreement
While it may seem unromantic to have a contract with a significant other, consider this similar to a prenuptial agreement. (Or a business arrangement if you are purchasing with a relative or friend.) If you truly care and respect the other, you will want to make sure that everyone is treated fairly and equitably, if things fall apart.
Legal property agreements are more common then you know. Find a real estate attorney to do the heavy-lifting and walk you through the potentially awkward financial details without regard to emotion. Many employers offer legal services such as this in their employee benefits package.
Property agreements can be as complex as you need them to be but most will cover all the uncomfortable situations and the related minutia such as:
- What if one person wants to sell and the other doesn’t. How will you handle this? Is it possible to dissolve a real estate contract without the cooperation of the other party?
- What happens if you break up or marry? Some relationships end some go the distance. It’s impossible to know which yours might be, but too financially risky not to plan for either scenario.
- What if one person dies? This can and does happen. If your significant other dies, his or her share of the home will not automatically pass to you.
The Long and Short of it…
Don’t rush into it. Going into a long-term transaction like buying a house, deserves time, care, and thoughtful discussion. If you’re both willing to do the homework and consult professionals to ensure everything is in place to handle potential pitfalls, then you are off to a great start.
The peace of mind that comes with knowing there’s another person mutually interested and invested in the success of your partnership is invaluable. Even if you’re not ready for marriage or have made a choice not to marry but still wish to share a home, you’ll have a partner in homeownership with whom to share your life. It’s hard to put a price on that.