First time homebuyer couple
@cookienanster/Twenty20

Every year more Americans choose to live with their significant others in un-wedded bliss.

The number of cohabiting adults in the U.S. has increased significantly in recent years. Some 18 million unwed couples shared the same residence in 2016, a 29 percent increase from 14 million in 2007, according to the U.S. Census Bureau.

It’s not just for younger folks, either. While half of unmarried couples who live together are younger than 35, almost a quarter, 23 percent, are 50 or older, according to a Pew Research Center analysis of the Current Population Survey.

Naturally, like married couples, some unmarried couples want to buy a home together.

But unmarried couples face more risk and cost than their married counterparts because they aren’t protected by the same property laws. The law treats unmarried couples as individuals in the event one person dies or you separate.

“With married couples you’ve got the domestic relations courts that have a framework of rules. Those rules don’t apply when an unmarried couple splits up,” says Barry Kreisler, principal attorney of Kreisler Law in Chicago.

What are the laws for unmarried couples?

Because the law treats unmarried couples like individuals when it comes to assets like real estate, it’s up to the couple to write their own rules that will dictate how their property is handled in the event of separation or death.

“All relationships are risks and buying a property is a risk too; just because you’re married, doesn’t mean you get a freebie,” says says Brandi Bernazzani, CEO of Scalisi & Bernazzani Financial Services. “I have a client I just saw the other day who owns a property with her spouse and the spouse decided he doesn’t want to be married anymore and now they’re selling their house. It’s just that if you’re married there are rules that stipulate how that happens and who owns what. Those defaults aren’t in place when you aren’t married,” says Bernazzani.

To get the same protection, unmarried couples must write their own defaults. This cohabitation property agreement should include rules for how the property will be divided, buyouts, exit strategies and the dispute process. You can also stipulate what percentage of the property each party owns. For example, if one person puts up 80 percent of the down payment, they might want a larger share of ownership, which could be stipulated in the agreement.

“The key thing is for them to put their expectations for each other in writing. Are they going to contribute financially on an equal basis? Who is paying for what?” says Keisler.

It’s wise for couples to create a cohabitation property agreement with an attorney while they’re in a harmonious state, says Keisler.

“While they’re happy, that’s the time to resolve what happens if they break up or one of them gets a job transfer.”

What to include in a cohabitation property agreement

  • Type of ownership on the deed (joint tenancy with rights of survivorship or tenants in common)
  • Percentage of the house each party owns
  • Payment responsibility
  • Buyout agreement
  • What happens if there’s a job transfer
  • Dispute process
  • Exit strategy

What if I’m not on the mortgage?

If you or your partner have bad credit, then you might not qualify for a mortgage together or your mortgage interest rate will be higher. Then you might decide, as a couple, that only the person with good credit should be on the mortgage.

Lenders get credit scores from all three reporting agencies and generally take the second-highest score, or the middle score of all three. This means if the three agencies report your scores as being 689, 682 and 676, respectively, the lender will use the 682 number.

If two people are applying for a mortgage, the lender looks at both applicants’ middle scores and takes the lowest of the two. So if you’re middle score is 682 and your partner’s is 575, then your score for the mortgage application is 575.

“If one person has bad credit then they could be a partial applicant as long as the partner can handle the additional debt. They could also be on the title but not on the loan. But, that’s a big risk because you’re giving someone half the house,” says Mark Kraft, regional mortgage manager for U.S. Bank in Denver.

If you decide to leave one person off the mortgage but both parties are on the deed, the person who is on the mortgage shoulders the legal responsibility to repay the loan.

“The benefit of being on a title is that your ownership interest is official. The person on the mortgage has all the liability, while the person on the title has rights with no liability,” says Kreisler.

The situation could also be a problem for the person who is on the deed but not on the mortgage. For example, if they’re paying half the mortgage costs and taxes, but the person whose name the loan is under secretly stops paying the mortgage, the house could be repossessed by the bank. The partner on the deed could be out of their cash and house.

Who gets the house post-breakup?

Breakups are hard enough, but assets complicate the situation.

Assuming both parties are on the deed and there’s no property agreement, the house can either be sold or one person can buy out the other.

“The truth is, the bank could force the sale of the property if you break up. And, if one of you wasn’t in the position to buy out the other party, then you would have to sell the property and move,” says Bernazzani.

Any party can force the sale of the house at anytime. If you have a property agreement and own 85 percent and want to stay in the home and your partner wants to sell, then you would only need to buy out their 15 percent ownership. However, if you’re both on the mortgage then you would also have to refinance the mortgage in your name.

“The only way you can take someone off the loan is if you refinance,” says Kraft. And that assumes you could qualify for the entire loan in your name.

What happens to the property if one of us dies?

With a married couple the laws of intestate succession apply if neither party has a will. The law basically states that if you’re married and don’t have children it goes to the survivor; these rules aren’t automatic for unmarried couples, says Kreisler.

In the case of unmarried people it depends on how they hold title. There are two ways to hold title: tenancy in common and joint tenancy with rights of survivorship. Tenancy in common, or TIC, means each person owns a percentage of the house and if they die then their interest in the property goes to their estate.

Joint tenancy with rights of survivorship dictates that if one person dies the survivor inherits their share of the property.

Another way to own the property is through a partnership.

“In the partnership agreement you can put down exactly what you want to happen in the event of death, as well as disability or a break-up,” says Kreisler.

What if we’re planning on getting married eventually?

There is a distinction between the philosophically unmarried couple and the soon-to-be married couple, Bernazzani says. People who plan on getting married but want to buy a house together first should consider the costs that will likely arise in the event of a break-up.

Even with a property agreement in place, as an asset class, real estate is expensive to exit.

“If you want to sell a property because things aren’t going well you’re going to pay 5 percent [broker commission] and all sorts of closing costs. It’s not like saying ‘oh, I don’t like that mutual fund, I’m going to sell it,’” says Bernazzani. “Depending on how much you paid for that real estate, that 5 percent can be 5 percent of a really big number.”

For that reason, couples who plan on eventually getting married should pump the brakes on buying a house until after the nuptials, says Bernazzani.

“I work with a lot of unmarried couples, some because that’s their philosophy and some because they’re just not ready yet. Generally speaking, unless they’ve been together for a long period of time and maybe just philosophically they don’t want to get legally married, I’d probably dissuade most clients from buying a home with their potential, eventual spouse,” Bernazzani says.

It can be hard to talk about break-ups and death in the midst of a landmark event in your lives: buying a new home together. However, creating a legally binding document that outlines both of your wishes for your property is a smart move that your future self might thank you for.