The Wall Street Journal recently published a story stating that by following some essential steps, unwed partners can mitigate many hurdles when buying a house.
This may seem surprising, as U.S. home sales have risen to a record 14-year high and families are currently searching for larger spaces while in quarantine. As a result of the COVID-19 pandemic, more unmarried couples are considering buying a house together. For these couples, there are multiple risks, both financial and practical, that need to be considered.
Millennials and the Z-Generation… and Baby Boomers?
There doesn’t seem to be a whole lot of interest in rushing to the altar these days. The number of unmarried partners that are living together nearly tripled in the last two decades to 17 million. But it’s not just millennials and the Z-Generation. There was actually a notable increase among those aged 65 or older according to the U.S. Census Bureau and Netflix’s “The Villages'' documentary Some Kind of Heaven (2020).
As a result of this, some financial advisers are getting inundated with more and more requests for advice from couples of all ages who want to buy a home together, but have no interest in getting married.
Guide for What to Consider Before Buying A Place Together
People are getting smarter these days, and upset (with valid reasons) about the sky high rent in places like New York and Los Angeles where $3,000+ a month rent barely gets you a “semi-nice” one bedroom. Why pay that when you can get a mortgage for a mansion in Georgia for the same price?
You need to be sure that both you and your partner are ready to buy a house. With this, you will then need to discuss how the two of you will share your money and expenses. This needs to be discussed with full transparency and should include any debts or other income the other partner may not be aware of.
You’ll also need to decide if and to what extent you will share the financial burden going forward. This talk should include discussions regarding: repairs, property taxes and other home expenses will be shared or handled. Having a joint bank account that is dedicated to house expenses such as repairs may be a good idea.
Which Ones of Us Should Apply for the Mortgage
When you’re ready to get the mortgage, you can put your best foot forward by having the individual with the most income, best FICO score and best debt-to-income ratio go through the application process. Or you could opt to have both be on the mortgage as co-signers. If you were to go this route, then unfortunately, the lower of the two FICO scores will be used. But the added benefit of this is that the couple could potentially borrow more, depending on their financial situation.
However, the buyer with the best qualifications can be the only one on the mortgage and this could result in a favorable interest rate and mortgage terms if the other partner has a low credit-score. Or you could partner up with an active-duty military member or veteran who can get a VA home loan with $0 down and highly-favorable interest rates, no matter their credit!
The mortgage holder will be solely responsible for the entire debt, so if you and your partner break up and you hold the mortgage, you will owe all the money.
Who Holds the House's Title
This is a great question, and an extremely crucial part of the decision making process. Depending on your situation, it is best to make sure that you and your partner discuss the legality of home-ownership with your lawyers. Titling options include sole ownership, joint tenancy with rights of survivorship, or tenants in common.
Titling of the house can be a crucial role during a breakup or when one partner dies, and will determine who gets how much equity in the house. For example, if the couple own property as tenants in common and the deceased partner doesn’t name the surviving partner as the beneficiary of the house, the survivor could become a co-owner with their late partner’s relatives or heirs.
For younger couples, tenants in common tend to be the most common form of titling, as each often wants to have an ownership stake but may not want the other person to inherit that stake (as would be the case if they owned the home in joint tenancy with rights of survivorship).
If the relationship doesn’t work out, fear not! There will be some questions that the couple needs to answer such as whether or not there will be a forced sale, or can one partner buy out the other and for what price, and how will the proceeds be split?
In this situation, it is recommended that there be a written and signed legal agreement, such as a simple partnership agreement solely dealing with the home, to answer these questions and to also spell out each of the partners’ rights and obligations, even if the relationship continues.
One of the best benefits to buying a home as an unmarried couple is the ability to bunch itemized deductions on one person’s tax return and take the standard deduction on the other partner’s tax return.
If the couple were married but filing separate tax returns, they would have to either both itemize or both take the standard deduction. However, when the couple isn’t married, one individual can itemize their deductions (if the total is higher than the standard), claiming the mortgage interest, property taxes and all other allowable deductions while their partner can choose to take the standard deductions. As a result, this could maximize deductions for the couple over time, maybe more so than what they could claim as a married couple, resulting in maximum tax savings.
Special Thanks to Law Clerk William Taylor Gleason for his assistance with this article.