While lenders set plenty of prerequisites for buying a home, marriage isn’t one of them. In fact, 9% of homebuyers in 2020 were unmarried couples, according to a report from the National Association of Realtors.
Taking out a mortgage with your partner is always a major commitment, but unmarried couples have to take extra steps to protect their rights.
1. Understand the risks
Unmarried couples generally face more risk when buying a home together than their married counterparts. If a married couple divorces or one partner dies, laws stipulate how the couple must divide assets. Those defaults aren’t in place for unmarried couples.
Keep in mind: The situation also becomes risky if there’s one person on the deed, but not on the mortgage. If the partner on the mortgage stops making payments, the bank may eventually foreclose. The partner who’s only on the deed could be out of a home and any money they put into it.
While lenders can’t use marital status to deny a mortgage application, it could be harder to qualify for the loan if both partners apply for the mortgage and one has a spotty credit history.
2. Get an accurate picture of your partner’s finances
Because both partners’ financial health impacts mortgage qualifications, it’s a good idea to go over these points before buying a home as an unmarried couple:
- Credit history: Your credit score and the information in your credit reports will influence whether you’ll qualify for a mortgage and the interest rate you receive.
- Debts and income: Lenders calculate your debt-to-income ratio to determine if you can comfortably take on a monthly mortgage payment.
- Home expenses: Talk about how much each partner can put toward the down payment, closing costs, monthly mortgage payment, and housing expenses.
- Potential scenarios: If both partners take on the mortgage together, they’re equally responsible for the debt — so missing payments can impact both partners’ credit scores. Saving three to six months’ worth of expenses can help ensure you won’t default on the loan.
3. Figure out who should apply for the mortgage
After discussing your financial situation, you’ll have a good idea of who should apply for the mortgage. You have two options: both partners apply for the mortgage together or just one person takes on the loan.
How to qualify for a mortgage
When you apply for a mortgage, the lender verifies your income, pulls your credit, and reviews your outstanding debts. They’ll also factor in the size of your down payment before offering you the loan terms.
Check Out: Credit Score Needed to Get a Home Loan
Single or joint application: How to decide
Choosing the right application strategy as a couple can help ensure you qualify for the mortgage and even yield better interest rates or loan terms.
If you’re considering a home purchase, be sure to shop around for a great mortgage rate and calculate your mortgage payment beforehand. Credible makes this easy. Use our mortgage payment calculator and once you have a good idea of the type of loan and rate that works for you, start comparing loan options from all of our partner lenders for free.
4. Choose the right type of deed for your situation
When you buy a home, you receive a document called a deed that shows the seller legally transferred ownership of the home to you. You have a few options when choosing the type of deed:
Sole Ownership
What it means:
Only one person is listed on the deed and has all the rights and responsibilities of homeownership.
This could be a good option if one partner doesn’t financially contribute to the home. But if both partners plan to share financial responsibility, a sole ownership deed could carry risk.
The partner who’s not listed on the deed doesn’t automatically have legal rights to the property, so they would need to address property ownership in a cohabitation agreement.
Joint tenancy
What it means:
Each person owns 50% of the property.
If one partner dies, their share automatically transfers to the other person. But the title doesn’t outline what happens if the couple splits up. That’s why it’s important to create a cohabitation property agreement (more on that below).
Tenants in common
What it means:
The couple decides how to split up ownership.
For example, one partner could pay 75% of the homeownership costs and therefore own 75% of the home. The other partner would own the remaining 25%.
The downside? If one partner dies, the other person doesn’t have automatic rights to the deceased person’s share of the property unless named in a will or living trust.
Getting a mortgage pre-approval is a good way to figure out how much you could borrow as a couple.
5. Consider a cohabitation property agreement
A cohabitation property agreement is a contract between people who are in a romantic relationship and live together. This document protects both partners financially and outlines what happens to the asset if the relationship ends.
To draw one up, talk with an attorney who knows how your state treats this type of agreement and what it should include, such as:
- The type of ownership on the deed
- Percentage of the house each partner owns
- How expenses are shared
- How to divide new assets in the home, such as furniture
- Buyout agreement
- Dispute process
- Exit strategy
Agree on how to split up the costs
There’s more to a mortgage than the monthly payment. Couples will also need to figure out how these expenses will be covered:
- Down payment
- Closing costs
- Cash reserves
- Homeowners association fees, if applicable
- Homeowners Insurance
- Monthly mortgage payment
- Property taxes
- Home repairs and maintenance
There’s no right way to divide up these costs. You’ll need to have a conversation with your partner to determine what’s fair and how much each person can afford.
Plan for worst-case scenarios
Your relationship may end in a breakup or death — and while those topics could be uncomfortable to discuss, it’s best to do it now. If both partners are on the deed and the mortgage, the cohabitation property agreement should determine what happens if the relationship ends.
In the event of a worst-case scenario, you may decide to:
- Sell the home and split the proceeds according to the cohabitation agreement
- Have one person buy out the other person’s equity
- Refinance the property and put the mortgage under one name, assuming they qualify for the entire loan
