Not ready to get married, but ready to buy a home? You and your partner aren’t alone. Unmarried couples made up 9 percent of homebuyers in 2020, according to the National Association of Realtors. That number seems likely to increase, too, as couples reconsider the financial implications of saying “I do” in the wake of the pandemic.
While buying a house with your partner can feel like an exciting new chapter, it’s important to recognize that it doesn’t necessarily look that way in the eyes of a court.
“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, a real estate attorney based in Chicago.
If you’re an unmarried couple looking to buy a house together, consider these six questions before beginning your search:
1. What are the laws for unmarried couples?
In a select few states, your decision to live together as partners could classify your arrangement as a common law marriage. However, laws in most states treat unmarried couples like individuals when it comes to assets like real estate. So, it’s up to the couple to write their own rules that dictate how their property is to be handled in the event of separation or death.
2. What should be included in the property agreement?
To get the same protection as a traditionally-recognized marriage union, unmarried couples buying a house together must write their own defaults. This is typically known as a “cohabitation property agreement,” and it should include rules for how the property will be divided if the worst happens. The agreement should have clear details, including:
- Type of ownership on the property deed (joint tenancy with rights of survivorship or tenants in common)
- Percentage of the house each party owns
- Payment responsibility (and what happens if one party doesn’t fulfill their obligation)
- Buyout agreement
- What happens if there’s a job transfer
- Dispute process
- Exit strategy
“The key thing is for them to put their expectations for each other in writing,” Kreisler says. “Are they going to contribute financially on an equal basis? Who is paying for what?”
It’s wise for couples to create this agreement with an attorney while they’re in a harmonious state — “that’s the time to resolve what happens if they break up or one of them gets a job transfer,” Kreisler says.
3. What if I’m not on the mortgage?
If you or your partner have bad credit, you might not qualify for a joint mortgage — and, even if you do, your interest rate will be higher. To avoid this, you might decide as a couple that only the partner with good credit should be on the mortgage.
Mortgage lenders pull credit scores from all three reporting agencies (Equifax, Experian and TransUnion) and generally take the second-highest score, or the middle score of all three. This means if the three agencies report your scores as 689, 682 and 676, respectively, the lender will consider the 682 number for your loan application. If you’re applying for a joint mortgage, the lender will look at both applicants’ middle scores and take the lowest of the two. If your middle score is 682 and your partner’s is 575, then your score for the application would be 575.
While one partner’s higher credit score will increase the odds of approval and better terms right now, things can get thorny when it comes to the down payment and determining who pays for what, and sole ownership could create major headaches later on down the road.
“If one person has bad credit, then they could be a partial applicant as long as the partner can handle the additional debt,” says Mark Kraft, regional mortgage manager for U.S. Bank in Denver. “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.”
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,” Kreisler says. “The person on the mortgage has all the liability, while the person on the title has rights with no liability.”
The situation could also be a problem for the partner who is on the deed but not on the mortgage. For example, if they’re paying half the mortgage costs and taxes, but the partner whose name the loan is under secretly stops paying the mortgage, the house could be repossessed by the lender. The partner on the deed could be out of their cash and house.
4. Who gets the home if you break up?
Unmarried couples buying a house certainly plan to stay together, but plans often change. While a breakup is hard enough, owning a home together will complicate the situation. After all, you can’t split a house in half.
Assuming both parties are on the deed and there’s no property agreement, the home can either be sold or one person can buy out the other. You’ll need to establish a buy/sell agreement with a pricing mechanism and definitive timelines for acting on it. If neither party can buy the other out, the best plan is to agree to sell the home within a fixed period of time.
A property agreement can makes things easier to work through. If you own 85 percent, for example, 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,” Kraft says.
Refinancing a joint mortgage into a mortgage with one borrower can present some hiccups, too. You’ll need to be able to qualify for the entire loan in your name, and you’ll need to be prepared to pay all the closing costs for the new loan.
5. 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. That rule isn’t automatic for unmarried couples, Kreisler says.
In the case of unmarried couples buying a house, it depends on how they hold the title. There are two ways to hold title in this scenario: 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, 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.
A third 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,” Kreisler says.
6. What if we’re planning to get married eventually?
It can be hard to talk about break-ups and death in the midst of a landmark event in your lives: buying a home together. Perhaps you are planning on officially tying the knot down the road, so you wonder if you need to worry about any potential challenges. Even with an eventual marriage on the horizon, creating a legally binding document that outlines both of your wishes for your property is still a smart move.
If you do decide to get married, you will want to revisit all of the paperwork. For example, if only one of you is on the deed, you will want to add your spouse’s name to the deed. This can be done by filing a quitclaim deed.
You’ll also want to consult with a tax professional to ensure you’re maximizing the mortgage interest deduction. As an unmarried couple buying a house together, taking advantage of that deduction is a bit more challenging. When you decide to make it official, you’ll be able to enjoy the benefit of lowering your tax bill.
Dealing with questions about your mortgage is only part of successfully managing your finances. Here’s how to talk about your financial values and priorities with your significant other.