More couples than ever are trading wedding bells for that satisfactory jingle of a pair of new house keys. Co-homeownership is the new marriage, with unmarried couples representing nearly 15% of U.S. home buyers aged 24 to 35 years in 2015, up from a little over 11% in 2005.
With rising rent costs and less of a societal push to get hitched, some long-term couples are looking for more practical ways to show their commitment to each other. After all, a house is generally a better investment than a wedding.
However, there are a lot of risks involved in purchasing a house with another person, especially one you’re not married to. It’s a big decision, and there are a lot of things that both partners need to take into account before making it.
Here are some things you need to think about if you’re considering co-owning a home with someone you’re not married to.
Put Everything on the Table
Before you enter into homeownership with another person, married or not, you need to have a brutally honest conversation about finances. What are their spending habits? What’s your credit score? How do you plan on splitting up the mortgage payments? What if something happens and one person can’t afford their payments? How much debt do you both feel comfortable taking on?
Make sure your expectations are aligned, both for your relationship and your finances. Don’t make any assumptions and don’t move forward on the belief that everything will work itself out, no matter how much you love each other. Love is powerful, but it generally can’t solve complicated financial problems on its own. Letting potential problems go unaddressed can create resentment, which can hurt your relationship.
Have a fully thought-out plan for how you will pay for everything. If you’re keeping your finances separate, it might be a good idea to open a joint account for any house-related expenses.
Make sure you have similar wants as well, or at least can come to a compromise. If one of you dreams of living in an old home that’s close to town and the other wants something more modern and secluded, you’re not likely to make it past the house-hunting phase if you can’t find common ground.
Who Actually Owns It?
There are three different ownership options for unmarried couples. Each type has its own pros and cons, and there’s no one-size-fits-all. Talk about your needs as a couple to figure out what makes the most sense for you.
Joint tenancy is one type of ownership where multiple owners share equal stake in the home. With a joint tenant title, if one owner dies, their share of the home is transferred to the other owner. Joint tenancy can be beneficial since it ensures that both partners have equal rights to the property.
Tenants in common is a type of ownership where each person on the deed owns a specified percentage of the home. This option allows ownership to be apportioned according to how much each person is paying into a home. For example, if one partner paid a larger portion of the down payment, they can own a larger share. However, with this type, ownership isn’t automatically transferred over to the co-owner upon an owner’s death, so if you want the house to go to your partner in that situation, you need to specify that in a will.
Sole ownership is the third type. This is where just one partner’s name is on the title of the home. For mortgage purposes, having one person on the title can seem attractive if one partner has poor credit or for tax purposes if one person’s income is significantly higher than the other’s. Note, that a mortgage isn’t the same as a deed, and you may be able to add your partner to the deed even if they aren’t on the mortgage (however, this may have some hefty tax implications).
While opting for sole ownership can work to your advantage, it also has a higher risk for the person whose name isn’t on the deed, especially if they’re helping to pay for housing expenses, because legally they’ll have nothing to show for it. Additionally, if only one person applies for the mortgage, you’ll likely qualify for less money when you use one income versus two.
Sharla Lane recently purchased a townhouse in San Diego with her boyfriend of six years. Even though she has a better credit score than him, they opted for joint tenancy. She said that deciding how the property should be titled was the most difficult part of the process for them.
“I have a better credit score, so we defaulted to his score, which raised our interest rate slightly. I just told him he owes me dinners for life,” she said.
Many unmarried couples find co-ownership, either through joint tenancy or tenancy in common, to be the best option for them, because it protects both partners’ rights to the home, similar to the way a married couple is protected.
Get a ‘No-Nup’
It’s not fun to think about, but you need to sit down with your partner and decide what happens in the event you break up. Breakups hurt – don’t compound that pain by putting yourself into a position where you could be left homeless and several years into mortgage payments with no equity to show for it.
Don’t get us wrong, we know that unmarried couples can be just as committed as married ones. However, there’s a lot of legal framework in place to determine what happens when a married couple splits up. Beyond that, prenuptial agreements are a common way for married couples to protect their individual assets in the event of a divorce.
Unmarried couples who decide to enter into a big commitment like homeownership need a similar framework to protect themselves if they ever break up. Enter the “no-nup.”
Cohabitation agreements, or “no-nups,” as they’re sometimes called, are contractual agreements that allow unmarried couples who live together to make clear who owns what and how joint assets will be allocated in a breakup. They can also be used to specify what financial aspects of living together each partner is responsible for.
Get every part of your agreement in a contract. Talk to a real estate lawyer and get all your agreed upon terms down. Plan for every scenario.
Designate who’s going to be paying what bills, or if you plan on splitting everything 50/50. Do both partners have an equal responsibility for maintenance and repair fees? If only one partner’s name is on the title, the couple should include in the contract whether the other partner is responsible for any costs related to the house. And if one person ends up being unable to pay the bills, agree on whether or not the other will be expected to cover for them, and if you’ll have a repayment plan to ensure that partner gets their money back.
Plan for what happens to the house if you break up. Will one of you buy out the other’s share? Will you sell it together and pay off the mortgage? Will one of you remain living there while the other rents out their room? Don’t put off these questions. You don’t want to have to make this decision when feelings are hurt and emotions are running high.
Finally, agree on your expectations for the mortgage. If both of your names are on it, you’re both equally responsible for making payments. That means if one partner decides to skip town and stop paying, the other partner is responsible for making payments in full. Make sure you get it in writing what percentage of monthly payments you’re each responsible for.
Evaluate Your Relationship
Think about the type of person you’re with. How do they handle hardship? If you were to break up with this person, would you both be mature enough to figure out who gets the house? Even if it was a bad breakup?
You also should think about the ways in which owning a home together will change your relationship or add new challenges to it.
Lane feels that owning a home with her significant other has come with its own unique challenges.
“The ability to do house projects has opened up a Pandora’s box of new decisions to make together or not. I want a new fridge with an ice maker. He could care less,” she said. “In our rental, we had what we had. No arguments there.”
Owning a home comes with a lot of new responsibilities and decisions to be made. Make sure you’re ready to take that on as a couple.
If you haven’t lived with this person before, you might want to consider renting together first.
You should also consider the reasons for why you want to take this step in your relationship. It should be something you both equally want to do. One person shouldn’t be pressuring the other.
Make sure your reasoning for buying a home together is solid. This is a big decision with huge consequences for both of you, and if it doesn’t feel right, it might not be a good idea.
What If It Doesn’t Work Out?
What are some of the potential consequences of breaking up with someone you co-own a home with? If you don’t plan ahead for this problem, you could end up in a nasty legal battle to determine who gets the house. Potentially worse, if your name isn’t on the title, you could end up kicked out of your home and left with no recourse to get back any equity you may feel entitled to.
Not only do you have the home to worry about, but the mortgage as well. If both of your names are on it, you want to make sure you’re protected in the event that your partner isn’t able to pay or simply stops paying their share. Even with this specified in a contract, you might still end up stuck paying a two-income mortgage by yourself while you try to get your partner to pay.
This is why it’s so important to know what you’re getting into ahead of time, plan for the worst-case scenario and be confident in the person you’re going into this purchase with. Owning a home with your partner can be incredibly rewarding, and many people have done it successfully. But with such high stakes, you need to be sure it makes sense for you as a couple and individually.
Feel ready to take that next big step with your significant other? Head over to Rocket Mortgage® by Quicken Loans to get started online.
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