Buying a home with a significant other is a big investment and commitment, but having two incomes can more easily open the door to homeownership.
If you’re buying a house with a lover (or with a friend, parent, or sibling), here are a few things to know.
What You Should Know When Buying a House Unmarried
Before sharing a mortgage and house, a few heart-to-hearts about your purchase partner’s financial health and yours are in order. Being frank about debts, income, and projected job security is important. It’s a good idea to explore what-ifs as well.
Here’s a list of suggested questions to answer before sharing a deed or a home mortgage loan:
• Is the down payment to be evenly divided?
• Will mortgage payments, insurance, property taxes, any mortgage insurance and homeowners association dues, repairs, and utilities be split evenly? If not, how will they be divided up?
• What will happen if one person is unable to make their portion of the mortgage payments for a while?
• What will happen if one homeowner dies?
• If one person leaves and the mortgage is refinanced to remove one of the signers, who pays for the refinancing?
Most lenders underwrite each individual on the home loan. The weaker link will most likely determine the rate at which you can borrow money as a duo — or whether you can get a loan at all. When lenders pull credit scores from the three main credit reporting agencies, they usually focus on the middle score. Let’s say your middle score is 720, and your co-borrower’s is 650. Lenders will use the lower of the two for the application. Even a small change in interest rate can result in significantly more money paid over time. (See for yourself with this online mortgage calculator.)
Loans underwritten by Fannie Mae do have one exception to this rule. To determine whether an unmarried couple is eligible for a loan underwritten by Fannie Mae, a lender will look at the average of their credit scores. As long as the average tops 620, the loan will be considered even if one borrower’s credit score is below 620 (in the past, if either borrower had a score below 620 they would not have been considered for the loan).
Buying a Home Married vs Unmarried
Married couples often merge their finances and operate as a single unit. If spouses are pulling from the same pool of money, they don’t generally mind shortages from a partner when the mortgage payment is due.
Unmarried co-borrowers going in on a house together may need each party to pull its weight each and every month.
Then there’s this: What if a co-owner dies?
For the most part, a spouse has the legal right to inherit property from their partner whether or not the deceased spouse had a will. Domestic couples may have no automatic right to inheritance if a co-owner dies without a will in place (this is known as dying intestate).
Additionally, depending on the state and the way the married couple holds title, the surviving spouse will receive a partial or full step-up in basis upon the first title owner’s death, meaning the property’s cost basis will be reset to fair market value when one spouse dies. If the inheriting spouse decides to sell the property, the stepped-up basis will greatly minimize capital gains taxes owed or translate to none owed at all.
The step-up in basis is one way that some families harness generational wealth through homeownership. Unmarried co-owners should be clear about how they hold title and what that means in case one partner dies.
How to Handle the Title
Two or more unmarried people can take title to a house. The main two forms are:
Tenancy in common. This arrangement allows equal or unequal ownership; that is, one person may own 60% of the property and the other person, 40%. If one owner dies, their share of the property passes to their heirs. It does not pass automatically to the surviving co-owner.
Tenancy in common allows one owner to transfer their interest to another buyer or use their share as collateral for financial transactions. And creditors may place liens on that person’s share of the property.
Joint tenancy with right of survivorship. Each person owns 50% of the house. Upon the death of one of the joint tenants, the property passes automatically to the surviving owner.
If you want to sell your share, you don’t have to ask for permission to do so. Any financing involving the property must be approved by both parties. Creditors trying to collect a debt from one of the homeowners may petition the court to force a sale in order to collect.
A third option is sole ownership, when only one person is on the title. The person left off the title risks walking away with nothing if the relationship sours.
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
Preparing for the Mortgage Application
The mortgage process is mostly the same whether applying solo or with a co-borrower.
It begins by getting a feel for how much house both of you can afford. Getting prequalified and using a home affordability calculator are quick ways to estimate your maximum budget. Then talk about these questions:
Are you aware of each other’s credit scores, incomes, and debt burdens?
Is each of your debt-to-income ratios around 36%, max? If so, good, because this is a team effort.
Have you agreed on the type of loan that fits your needs? If not, a mortgage broker or direct lender can guide you.
Do you want the standard 30-year mortgage term, or is it in the budget to seek a shorter term, which will mean higher monthly payments but less interest paid?
Combining forces can make homeownership possible, especially for first-time homebuyers and anyone in a hot market. That’s exciting.
How to Make the Property Purchase 50/50
When each co-owner has a 50% share of the property, the status is joint tenants with right of survivorship.
Your real estate agent or attorney will need to be careful about the wording in the deed. It should reflect the desire to create joint tenancy, not tenancy in common.
What Happens If You Part Ways?
It’s a good idea to go into the deal with a written buyout agreement, just in case.
But if a pact is not in place, here are steps you could take to acquire the co-borrower’s share:
1. Hire an independent appraiser to determine the property value.
2. Find the difference between the mortgage balance and appraised value. That’s the equity in the house. If you each have a 50% share in the house, divide equity by two.
3. Negotiate the buyout price. If you can’t come up with cash, take any refinancing costs into consideration and …
4. Apply for a cash-out refinance. You’ll need to qualify on your own.
5. Have a real estate agent create a detailed purchase agreement. You are the buyer, and the co-owner is the seller.
6. If your refinance is approved, you will sign a deed transferring the seller’s interest in the property to you. The cash-out refi loan will pay off the original loan and, with luck, will provide the cash you need to pay your former co-borrower.
7. The former co-owner signs a certificate of title, deed of sale, loan payoff, and statement of closing costs to make you the sole owner.
If that route is not viable, you may need to get the co-borrower to agree to sell the house. If yours is an assumable mortgage, good. They’re in demand.
The Takeaway
Buying a house with someone you are not married to works similarly to purchasing a property when married, but there are some important conversations to have about how ownership is structured and what might happen if one of you dies or wants to sell. The more solid each buyer is financially, the better the chances of a good mortgage rate.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.
FAQ
What happens if one of us is not on the mortgage?
If two people’s names are on the deed but just one is on the mortgage, both are owners of the home but only one is liable for repaying the mortgage loan.
What needs to change if I get married?
If co-borrowers marry, the deed will need to be updated.
To add a spouse’s name to the deed, you must file a quitclaim deed. You can transfer the ownership rights from yourself to yourself as well as other people. Once a couple marries, they may want to hold title with rights of survivorship if they do not already.
Can I add my partner’s name to the mortgage after buying the house?
No. You’ll need to refinance your mortgage.
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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