1. Who's Applying for the Mortgage?
You want to figure out who has a better credit score and more stable finances between the two of you. Because you aren't legally represented as a unit, the partner who is applying for the mortgage will be the one to purchase the home to get the best interest rates and loans.
Examining your DTI (debt to ratio income), incomes, credit scores, employment status, and any additional assets will help narrow down who should apply for the home loan. However, credit scores could be a significant factor. Most lenders demand at least a credit score of 580, but if someone in your couple has a score of 620 or better, that will give you better loan terms and interest rates. Best terms and rates are the goal, as you should save interest or money through your repayment.
The best scenario (if you both are in good standing) is finding a lender that allows for an unmarried couple to apply together. This could bring a larger mortgage as you are combining both incomes. Again, if one of you has a low credit score, the stronger of the two should apply for a mortgage solo.
2. How Does the Title Work?
The title shows proof that you own the property and provides a physical description of it. There are also liens on the property that would allow others to claim it. Your lender, for example, will have a lien until you have paid off the entire mortgage.
Holding the title of your new home can be done in a few different ways. Also, the language of the title can affect your entitlement to transfer ownership. Here are a few terms to think about:
Joint Tenancy: This allows you both to have equal shares of the home when created under a single instrument with the right of survivorship. In other words, if one of you were to pass away, the survivor gets the other half of your property.
Sole ownership: If one partner wants to own the property, this is the language to describe that.
Joint Tenants In Common: Co-owners have equal rights and/or undivided interest in the property for their whole lives. With this language, each tenant holds a title for their part of the home and can get rid of or will their half of ownership. However, if one person dies, the other tenant does not get the deceased's property (as in Join Tenancy). The heirs of the deceased inherit the property.
Trust: A living trust of real property holds legal and equitable title to the real estate. The trustee holds the title for the trustor/beneficiary who retains all management rights and responsibilities. Keep in mind that most lenders can't close a loan in a trust -- but a borrower can always do this post-closing!
Whichever language you choose will produce a different outcome of the sale as it affects any taxes and fees for selling the home. How a title is held will impact the outcome of the property's sale. It's best to consult with a real estate agent or tax attorney to understand the best option for you and your partner.
3. What About a Cohabitation Property Agreement?
Equity can accumulate when couples cohabitate, whether they are married or not. However, the same property protections do not apply to unmarried couples as they do to married couples. Hence, an unmarried couple should have a cohabitation property agreement with their lawyer. This agreement will show who owns what and the course of action if the couple separates. Otherwise, you will most likely have expensive and exhausting legal battles. Let's look at the most agreements include:
- Type of ownership on the title and deed
- How income and expenses are divided
- How newly acquired assets are shared
- Buyout agreement
- Action plan for a job transfer
- Dispute process
- Exit strategy
Like in any merger, there is a lot at stake, both financially and emotionally. A cohabitation agreement protects your assets and your rights, and it also allows for an easier clean-up if you and your partner were to part ways. No one likes a messy situation.
4. How Will You Split Costs?
The cohabitation property agreement is an excellent way to plan how you will run your household without confusion. You and your partner can divvy out responsibilities however you wish. While you may want to split costs down the middle, some choose to open a joint bank account and deposit equal amounts monthly. There's always the chance that one partner can afford more than the other. There are so many scenarios, and it depends upon the couple themselves. Having conversations to determine how you want both to contribute is so effective for your financial life and your emotional one.
5. What Are You Splitting?
Owning and maintaining a home together is a huge responsibility, with many costs. In most cohabitation property agreements, the primary responsibilities that need to be covered are the mortgage, maintenance, utilities, landscaping, to name a few. Other costs can include property taxes, homeowner's insurance, HOA fees, repairs, and renovations.
6. What if the Relationship Ends?
Let's say the unfortunate happens, and you and your partner decide to go your separate ways. The house can be sold, or one person can buy out the other. This can happen only if both people are on the title. If there's a break-up, the bank could potentially force a sale of your property. If one person can't buy out the other, you would need to sell.
Depending on the agreement, either of you who owns any of the property can force a sale. Let's say you own 60 % of the home, and your partner wants to leave the relationship or move out, you might owe them 40% of ownership. Another scenario is to consider refinancing if you are both on the mortgage.
If one person passes away and the title states joint tenants in common, the part of the house owned by the deceased goes to their heirs. If the title states joint tenancy, the surviving partner gets the deceased's share of the property. In this case, the deceased's share of the property will have to be distributed depending on their wishes. That said, you may need to buy out the deceased party's share of the home or sell the home outright, depending on what the heirs decide.
Everyone deserves to make a home together, whether married or not. All it takes is commitment.
