Living together before marriage is nothing new. In fact, it’s now the norm. More than 75% of recently married couples cohabitated prior to tying the knot, according to the National Center for Family & Marriage Research. But these days, many couples are doing more than just splitting the rent. They’re taking the big step of purchasing a house together. A recent study found that 31% of Americans have purchased a home with someone they aren’t married to and more than half of those surveyed said they would consider it.
Buying a house with your partner can have its benefits. The dual incomes may allow you to enter the housing market earlier than you would have alone. This means you’ll start building equity in a home sooner. Instead of spending money on rent that you’ll never recoup, you can start paying for an asset you’ll eventually own. However, as with any major life decision, there are some unique factors to consider when buying a house with your partner before marriage.
Qualifying for a Mortgage
First off, it’s important to know that your martial status has no effect on your mortgage application. In fact, it is illegal for a lender to discriminate against a loan applicant based on marital status.
The big decision for unwed couples applying for a mortgage is whether they should apply jointly or for one member to apply alone. The answer depends heavily on you and your partner’s financial profile. If you both have good credit scores and low levels of debt, it could be a good idea to apply jointly. Showing two incomes on your application increases your chances of getting approved for a larger mortgage.
However, when applying jointly, lenders often base their decisions on the lower of the two credit scores. Therefore, if one of you has a significantly worse financial situation, it may be best for the other to apply alone.
There are three options for designating ownership when co-buying a house:
Joint ownership: Joint ownership allows both parties to own an equal share of the home. With this, both members will have to come to a joint decision on whether to sell when the time comes. And, if one owner passes away, ownership of the property is automatically passed to the surviving owner.
Tenancy in common: This arrangement gives ownership to both parties, but in unequal percentages. It is a popular option for unmarried couples due to its flexibility. For example, if one member is contributing significantly more money toward buying the house, they might have 70% ownership while their partner owns the remaining 30%. Tenancy in common also allows each member to designate an heir to assume their share of the property in the event of their death.
Sole ownership: As the name implies, sole ownership means only one person legally owns the home, even if there’s another person living there. The owner is the only one who can decide to sell the house.
Regardless of the type of ownership agreement you agree to with your partner, it’s a good idea to establish a cohabitation agreement. This legally binding document protects each party and is particularly useful if the relationship turns south and you decide to go your separate ways. The cohabitation agreement can include:
- Who is responsible, and at what percentage, for each aspect of the property’s payments (mortgage, property taxes, maintenance, etc.).
- If the relationship ends, what happens to the house. Will both parties agree to sell, or will one buy out the other?
- If the house is sold, how the proceeds will be divided.
- How newly acquired assets will be divided.
Since a cohabitation agreement is a legal document, it is best to consult a real estate attorney when drafting it.
Married couples are allowed to deduct the interest on up to $750,000 in mortgage debt when filing jointly or $375,000 if filing separately.
An unmarried individual can also claim interest deductions on up to $375,000 in mortgage debt. However, the IRS only permits one homeowner to claim the deduction if unmarried. If both you and your partner are planning to itemize your deductions, the issue of mortgage interest should be discussed and agreed upon beforehand.
AAA recommends consulting a tax expert regarding the filing process.
What Happens If You Get Married
If you and your partner eventually tie the knot, you’ll likely want to revisit your home ownership paperwork. Property ownership is often dictated by state law. In some states, your spouse will automatically gain ownership of the house once you are married. In other states, you may need to add your spouse to the deed (if they’re not already on it) to legally reflect co-ownership.
Whether you’re buying solo or as a couple, AAA Home Loans is here to answer all of your home buying questions and offer the best rates possible.
And if you’re new to the home buying process be sure to check out our upcoming webinars!