Which Comes First – Marriage or Mortgage?
Are you and your partner thinking of saying “I do” to a mortgage before saying “I do” to marriage? You’re not alone. Many couples choose to combine assets and finances prior to the union of marriage. One study noted that 25% of couples between the ages of 18-34 purchased a home together prior to marriage, and 14% of couples over 45. From one perspective, homeownership with your partner may make a lot of sense. Whether you currently live together or not, high rental costs, low mortgage rates, and tax breaks make homeownership attractive. Why spend more individually when you can combine and spend less, or cash in on the perks of homeownership together? Sounds simple enough, but be sure to consider the potential pitfalls if the relationship goes south. Here are some things to consider.
A different kind of partnership
Purchasing and owning a home with your significant other will certainly advance your relationship. However, owning a home isn’t always sunshine and rainbows. Owning a home together, in a sense, also makes you business partners. What’s the best way to nurture a healthy business relationship? Proper preparation, communication, support, and a clear understanding of how your relationship will evolve. Together, you’ll be faced with big decisions and stressful challenges that may test your relationship.
Credit check
Most couples are probably already keen to one another’s finances, if they aren’t combined already. However, you’ll want to make sure you are both transparent and aware of your credit situations. Review all of the factors that will be considered by a lender when assessing each of your creditworthiness, such as credit history, debts, and income. By the way, both parties’ creditworthiness WILL be assessed, so keep that in mind. You may find that together, you and your partner have a rockin’ financial situation—which may be the reason you decided to buy a home together in the first place. Oftentimes, two healthy credit scores can open a lot of (front) doors for prospective homeowners. Alternatively, you may discover that you and your partner’s creditworthiness isn’t so healthily balanced. Avoid the headache of uncovering financial skeletons by planning early. The sooner you find these credit skeletons the sooner you or your partner can take the steps to [increase your credit before buying a home together.
Know your options
There are some loans that require joint applicants to be legal partners, which ultimately creates some limitations. For example, the VA only recognizes “married spouses of qualified veterans as co-signers on VA loans.” Be sure to check with your lender as early as possible to make sure you and your partner are able to get the best loan for your situation.
Keep in mind, although one name is on the home loan, having both names on the title may be allowed, or you may be able to add them later.
Legalities
Legally speaking, you’ll want to know your options, as well. In order to protect both yourself and your partner, it’s smart to check off some necessary legal boxes.
Start by drafting a cohabitation agreement and property agreement. A cohabitation agreement outlines both you and your partner’s responsibilities, interests, and protected assets. For example, part of your cohabitation agreement may cover who will pay the monthly mortgage, or if split, how much each of you will pay per month. Here is a sample cohabitation agreement. A property agreement will outline shared versus personally owned property and what will happen to both in the event that the relationship ends. This may include not only the home, but also its contents (furniture, appliances, electronics, etc.). Some property agreements may even include your car or other larger assets. As always, it’s smart to get help from a lawyer when preparing these sort of agreement documents. When it comes to a mortgage, a cohabitation agreement won’t supercede both borrowers’ obligation to pay the mortgage. So if the agreement states that one person pays the mortgage while the other pays all the household bills, at the end of the day, both people are still responsible for making the payments, no matter what.
Buddy up on a budget
A big challenge with most couples (married or unmarried) is agreeing and sticking to a budget. This isn’t just a budget for living expenses—chances are you already have that worked out—but a budget for the home buying process. How much can you realistically afford together? Remember, when your lender calculates how much home you can afford, it may not be the amount you're comfortable spending. Be sure to also factor in the following costs:
Down payment
Monthly mortgage payments (don’t forget taxes and insurance)
Homeowners association fee
Costs for upgrades
Upkeep and maintenance
Will you split these costs evenly? If not, determine how these costs will be covered in a way that works for your partnership. If any of these costs will accrue debt, be sure to discuss how that will be repaid and whose name will be responsible for repayment.
Backup plan
Buying a home with a partner before marriage comes with a little risk. No one wants to be a negative Nancy, but it’s a smart idea to plan out those worst-case scenarios. What happens if you split? Would one of you stay in the home? Would you sell it? How would that process look?
I know, these aren’t fun questions—but you should clearly outline the answers before buying a home with your partner. You’ll be grateful you did, especially in the unexpected event that something does go wrong.
For more information on purchasing a home with your partner before marriage, don’t hesitate to reach out to a mortgage banker.