Buying a Home Huge Step for Couples
Whether married or not, buying a home is one of the most important steps any couple takes together. Along with deciding on the actual house, experts suggest discussing the your finances and how you’ll pay for your new home.
“It’s important for couples to have the conversation about money and financial goals,” says Milton Dellossier, regional diverse segments manager at Wells Fargo Home Mortgage. “For most Americans, purchasing a home is the largest investment people will make in their lifetime."
These conversations aren’t always easy though. Ultimately, your budget and credit will determine the house that you can afford. Once you figure out what you can spend, you and your partner can make those decisions regarding location and the type of home you’d like. The more conversations you have early on, the more streamlined the house hunting process becomes.
As you navigate this process, experts provide tips on what to consider.
Disclose your Financial Past
“Full disclosure is very important — have that honest conversation with your partner to talk about your credit profile and any issues,” says Dellossier.
Prior to meeting with a mortgage professional, along with disclosing your salary and what you can contribute to a down payment, discuss with your partner whether you’ve had any financial hardship, foreclosures or short sales. “Because people don’t know what the other has, there are conversations happening in a bank lobby that should probably be happening at home,” says Dellossier.
It’s important to know what you’re approved for too so you look for homes that you can afford. When you apply for a loan, the lender will review your debt-to-income ratios, or how much you pay out every month versus how much you earn. This ratio helps the lender figure out the amount of money they can loan you.
As your credit score helps a lender determine your ability to repay the loan, experts recommend running a credit report on each other. “Once you have the conversation about credit, determine if you want one or both of you on the note,” says Dellossier. Whoever’s on the note will be responsible for repaying the mortgage, but a bad credit score can hinder your chances of getting approved for a mortgage.
Decide on a Budget
There are a lot of costs associated with homeownership. “You may be jointly qualified to spend to the moon, but as a couple, you need to come up with a budget that you can stick to,” says Cara Ameer, broker associate and Realtor at Coldwell Banker Vanguard Realty based in Ponte Vedra Beach, Fla.
Now is the time to talk about each other’s saving habits and whether you live paycheck to paycheck. “Really take a look at your budget and your financials so you can be prepared for the realities of owning a property in the good and less favorable times, and predetermine how you will deal with those things,” says certified financial planner Chantel Bonneau, wealth management advisor with Northwestern Mutual. Think about how you’ll pay bills if one person loses their job and whether you want to rely on one or two salaries to pay the mortgage, as well as how you will split this payment.
Besides paying the mortgage, utilities, taxes and insurance, also decide on how you plan to maintain your property together. “Talk about how you live, whether you are willing to pay for domestic help or if you want to do all this work yourself,” says Bonneau. Either way, come to an agreement about how you’ll split these responsibilities. “You want to own the situation and not have the situation own you,” she adds.
Agree on Ownership
There are two legal issues with buying a home: ownership and debt. Titles give you ownership while a mortgage gives you debt. “Signing the mortgage means that the bank can come after you if the mortgage isn’t paid,” says Randy Kessler, founding partner of Kessler & Solomiany. “This is different from signing on the title.”
Most titles are generally joint, but there are creative ways to split ownership. “One person can own the house and give the other a security interest for a dollar amount,” says Kessler. If you’ve a security interest, you won’t benefit from any appreciation, but if house values decline, you won’t have a loss.
Regardless of how a married couple titles their home, a divorce court may overlook this and give the other person an interest in the house. “Generally speaking, there’s legal title and equitable title,” says Kessler. “Divorce courts deal with equitable title— what’s fair given the totality of the situation. When you’re married and living in a house, you acquire an equitable interest in the house.”
Unmarried couples may also want to enter into a partnership agreement or cohabitation agreement, which details what to do if one person wants to sell the house. The agreement includes, for example, mechanisms for choosing an agent, the listing price, when to lower the listing price and by how much, an acceptable sales price, when you must both agree to sell, how to split the proceeds, and how one person can buy the other person out of the house with a pre-purchase option.
Even though no one likes talking about breaking up, having a discussion about ownership will help you protect your finances. If your name isn’t on the title and you contribute to the mortgage, getting an interest in the house through a court would be an uphill battle, cautions Kessler. “Better safe than sorry— get it in writing.”