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Getting a mortgage and buying a home offers some significant challenges for two unmarried people that traditional couples don’t face. Some of those have to do with getting the loan itself; others have to do with protecting yourself in case the loan or the relationship goes sour.
While unmarried domestic arrangements are far more common today than they were a few decades ago, unmarried partners still account for only a small percentage of homebuyers, officially. Unmarried couples made up only 8 percent of all home purchases in 2010, according to the National Association of Realtors, compared to 58 percent for married couples.
Unmarrieds ranked well behind single women, who made up 20 percent of homebuyers, and single men, at 12 percent.
It’s quite possible that some of those single women and men were in committed relationships but were simply buying a home and taking out a mortgage in their own name only. But it doesn’t have to be that way, unless one partner has credit issues or excessive debt.
In fact, any two or more independent adults can join together to get a mortgage or buy a home. You don’t even have to be a couple, gay or straight. Sometimes, two or more families may go in together to buy a large home they all can share, a situation that sometimes occurs among extended families or siblings may opt to buy a home together because it makes sense at their present stage of life. The rules are the same.
Qualifying for a mortgage as separate individuals
First, there’s the challenge of qualifying for a mortgage. Most lenders have no problem with allowing two unmarried people to apply for a mortgage together. You might think they’d be concerned the loan could go unpaid if the couple splits up, but that risk is there for married couples as well.
When you apply for a mortgage together, you can combine your incomes so as to qualify for a larger mortgage than you could get if either of you applied separately. The problem arises if one person has weak credit, or simply a lower credit rating than the other.
Weaker credit score dominates
When two people apply for a mortgage, lenders will typically qualify it based on the weaker of the two credit ratings. So if one of you has a credit score of 790 but the other is at 670, the mortgage will be qualified based on the lower score. You may still get the loan, but you’ll pay a significantly higher interest rate than if the high-credit partner applied as an individual.
In some cases, lenders will use an average of the two credit scores. This is more likely to happen if you’re applying for a non-conforming mortgage (one not backed by Fannie Mae or Freddie Mac), such as a jumbo loan or a private-market mortgage where the lender plans to keep the loan on its own books, as many credit unions and small lenders do, rather than selling it on the securities market to investors.
There can also be a problem if one partner is carrying an unusually high debt load, such as accumulated credit card bills or student loans. Perhaps both of your car loans are in one partner’s name because they were able to qualify for a family member or employee discount.
» MORE: See today’s refinance rates
Applying in just one partner’s name
In that event, it may be more advantageous to apply for the mortgage solely in the name of the partner with the lower debt load. That’s particularly true if the new mortgage would push your combined debt-to-income ratio above 36 percent, at which point lenders tend to start increasing their down payment and credit requirements.
One of the biggest drawbacks of applying for a mortgage in just one partner’s name is that person bears the entire liability for the loan. So if their partner leaves and takes their financial contribution with them, that person is stuck with making the entire mortgage payment each month. Or if one partner loses their job and the mortgage goes into foreclosure, the entire hit is on the credit score of the person holding the loan.
Another downside of applying for a mortgage in just one partner’s name is that you can’t take the tax deduction for mortgage interest unless your name is on the mortgage. So even if both partners are paying the mortgage, only one gets the deduction. On the other hand, that could be beneficial in some situations, as it could increase the total deductions the two partners are able to take if one is takes the entire mortgage interest deduction and the other is claims the standard deduction.
Even if you’re applying for the mortgage in just one person’s name, you can generally have the title to the home itself listed in both names. Some lenders may balk at approving the loan in such situations, however, in which cases you may need to find a different lender.
Aside from actually obtaining a mortgage and buying a home as an unmarried couple, there’s a whole separate set of challenges related to how you’ll set up ownership, obligations for mortgage payments, utilities and upkeep; as well as protecting yourself in the event of a breakup.
What the Law Says About Unmarried Couples and Mortgages
Although it’s become very common for unmarried couples, straight or gay, to live together in long-term committed relationships, the law is still primarily oriented toward married couples when it comes to matters of home ownership.
For the most part, unmarrieds still have to work out their own arrangements when it comes to shared ownership, inheritance rights or how the property is divided in the event of a break-up.
Married couples generally don’t have to worry about that – state laws have taken care of those thing for them through divorce and inheritance laws, though they can still specify other arrangements through prenups and wills. While some states do have community property laws that govern the disposition of shared property in the event of death or splitup, it’s still a necessity to set up your own “prenup” when buying a home together as unmarrieds.
Joint tenants vs. tenants in common
Depending on how you wish to proceed, you may choose to take possession of the property as either joint tenants or tenants in common. Joint tenants share fully in ownership of the property, so in the event of a split each are entitled to an equal share. Tenants in common may hold unequal interests in the property, such as a 30-70 split, and partners do not automatically inherit their partner’s share if the latter should predecease them.
Will your partner inherit your half?
One of the most important issues to address for unmarrieds to address when purchasing a home together, and one many prefer to ignore, is the matter of inheritance. Even more than the possibility of breaking up, the inevitability of death is something that many couples are just not comfortable dealing with.
However, if your partner should pass on without a will leaving their interest in the home to you, it’s quite likely that you could find half of your shared homes in the hands of your partner’s relatives. Possibly even more, if it could be shown that they paid the major portion of the mortgage, utilities and other costs of the property.
Protecting your interests
You should also agree beforehand exactly how the property will be disposed of in the event the two of you go your separate ways. Though we all like to think we’ll be able to negotiate this like adults if the time should come, that doesn’t always happen, unfortunately.
At a minimum, you should spell out what each partner’s financial interest in the property will be. Will it be a straight 50-50? Will one partner hold a greater interest if he or she is putting up the down payment or will be paying a larger share of the mortgage? What happens if one partner suffers a loss in income so the other has to take on more of the mortgage burden? All this should be considered.
You also need to think about what happens to the home? If the property is to be sold, you can simply split the sales proceeds, but what if one wishes to stay? How will that person buy out the other’s interest? How will you arrive at a fair price? (hint – think independent appraisal).
If one person may wish to stay in the house, you’ll want to include a provision in your “prenup” that they refinance the mortgage in their name alone. Otherwise, if both of you are named on the mortgage, both parties continue to be responsible until the loan is paid off. You can take your name off the property title simply by signing a quitclaim deed, but you can’t simply excuse one party from a mortgage so easily. A provision that the home be sold if the partner getting the property cannot refinance it is a very good idea.
Planning for home expenses
Your homeowners’ prenup should also specify how the major expenses of owning the home, aside from the mortgage, will be addressed. Although you may not need to actually specify how the utility payments are going to be divided – relationships are based on trust, after all – it’s not a bad idea to spell out responsibility for major repairs and upkeep is to be handled.
Owning a home together can offer a lot of benefits, both financial and personal, for two people who have chosen to make a life together, and for many it even represents the level of commitment others find in marriage. However, just like a marriage, be sure to go into it with your eyes open and take the necessary steps to protect the interests of yourself and your partner as well.