According to TIME, 25% of couples between the ages of 25-34 are now choosing to buy a home before getting married. There are quite a few factors that should be considered before buying a home with a significant other, and it’s very important that you and your partner have a candid conversation about these items before making a home purchase. It’s especially important for home buying couples to build a budget with each other and to be very transparent about their financial situation. Below are some of the top items to consider before buying a home with a significant other.
When buying with another person, you’ll need to consider the impact that person’s financial profile will have on your ability to qualify for a mortgage. If you’re getting a mortgage to pay for the home, there are three major financial factors that will be affected by your co-borrower:
Credit score – Lenders look at your credit score along with your co-borrower’s credit score when determining your mortgage eligibility. If your significant other has a lower credit score than you, it will likely have an effect on the interest rate you pay for your mortgage. Even if your score is great, the lender will look t both scores to determine the overall eligibility for the loan.
Debt – It is also important to be aware of how much debt your partner has. This will affect your co-homeownership in a few ways. Lenders look at debt-to-income ratio when determining your mortgage eligibility. If you’re buying home with someone who has high debts, like student loans, credit card debt, or personal loans, then their situation may affect the amount of money that you get qualified for.
Additionally, after you purchase a home together if your partner has debts that get out of control, the lenders may place a lien on your home to get their money back. At that point, if your partner cannot pay back the debt, the home could be repossessed by the lender to cover the payment. Obviously, this is not an ideal situation, which is why it is so important to have a clear picture of your partner’s financial well-being!
Down payment – Another (fairly obvious) factor that will be affected by your partner’s financial situation is the amount of the down payment they are able to cover. If you are able to put down significantly more than your partner up-front, it may be a good idea to structure the ownership to take that into account
For example: if you can put down $60,000 and your partner can only put down $40,000, you could agree that you own 60% of the home and your partner owns 40% of the home. The next section covers different types of ownership.
There are two types of ownership for unmarried co-owners: “Joint Tenants” and “Tenants in Common.”
The main difference between these two ownership statuses is what happens to the property when one of the owners passes away. In “Joint Tenants,” if one of the homeowners passes away, their portion of the home is transferred to the other owner of the home. However if the home is owned through the “tenants in common” status and one of the homeowners passes away, the portion of the home which was owned by that person is given to whoever is names in their will, or their family.
The other major difference in these types of ownership is how the equity in the home can be allocated. If a home is owned with the status “Joint Tenants,” then both homebuyers own equal parts of the property. Under “Tenants in Common,” the amount of ownership can be allocated based on ho much money each person put into the deal (like our 60/40 example above).
There are benefits to both types of ownership, and choosing the right one will depend on your situation. The bottom line is: before purchasing a home with a significant other, be sure to have candid conversation about your financial situation and the different types of ownership.