Couple customers consulting realtor lawyer or insurer about buying house or insurance services, … [+]
Getty
For previous generations, buying a home was a life milestone that often came after couples had already gotten married and combined households. These days, however, that cultural norm seems to be quickly changing.
According to a new homeownership report by WalletJoy, 72% of non-married Millennials said that they would purchase a home before getting married and 38% noted that they would purchase a home with a partner to whom they were not married. For their part, 66% of non-married Gen X-ers agreed, along with 64% of non-married Boomers.
While the decision of when to buy a home is, ultimately, a personal one, if you and your partner are considering purchasing a home together before getting married, there are a few unique considerations that you’ll need to keep in mind. Read them over so that you can come up with a buying arrangement that works for everyone involved.
Qualifying for a mortgage
The first thing to think about is whether or not you’ll use both of your incomes when trying to qualify for a mortgage. Notably, your marital status won’t make any difference here. Rather, this decision should be based on the strength of your financial profiles.
If you both have similar credit scores and levels of debt, it’s probably a good idea for you to apply together. In this case, having two incomes on the application will increase your chances of being approved. Plus, you’ll probably be approved for a higher mortgage amount when applying jointly than you would be if you were applying alone.
However, if one of you has a significantly lower credit score or a significantly higher level of debt, applying jointly may not be the best idea. Those factors could work against you by negatively impacting your chances of getting approved and of securing the best interest rate.
Dealing with the deed
Legally, ownership of the home isn’t determined by who’s on the mortgage. Rather, it’s determined by who’s on the deed, which records and transfers title for the home. There are a few different ways in which you can designate ownership:
- Sole ownership: Only one of you owns the home, meaning that you’re the only one who’s financially responsible for it and also the only one who can decide to sell it or borrow against it.
- Joint tenancy: With this arrangement, you’ll both own an equal share of the home and will have to come to a decision together if you want to sell it or borrow against it.
- Tenants in common: In this case, each person will own a share of the home. Though, those shares do not have to be equal, which makes it a popular arrangement if one person is contributing significantly more financially than the other. Each tenant can decide independently to borrow against their share and, in the event of death, that person’s share is passed to their heirs, rather than the surviving tenant.
Creating a cohabitation agreement
Even if you intend to get married, if you aren’t legally entangled at the time that you purchase your home, it can be a good idea to draw up a cohabitation agreement. Put simply, though no one likes to think about it, sometimes relationships do sour. It’s in your best to make some tough financial decisions beforehand, when tempers and emotions aren’t in the mix.
A real estate attorney can help you draw up one of these agreements. He or she can help you determine exactly what legal coverage you need, but here are some details that you may want to have your agreement spell out:
- Who’s responsible for paying for each aspect of the home’s financial requirements (mortgage payment, property taxes, maintenance and upkeep, etc)?
- If you do part ways, how will you deal with the house? Will you sell it or have one party buy out the other?
- If you do decide to sell, how will you split the net proceeds?
Navigating the tax consequences
Finally, there are a few tax ramifications to keep in mind when you buy a home before getting married. The IRS currently allows married couples to deduct the interest on up to $750,000 in mortgage debt (or $375,000 each if you’re married and filing separately).
However, if you’re unmarried and own a home together, only one of you can take the deduction. If you’re both planning on itemizing your returns rather than taking the standard deduction, you may also want to work this detail out in advance in order to avoid a stressful conversation at tax time.