Buying a House Before Marriage: What to Know

By the Mercury Team

Purchasing a home is one of life’s biggest decisions, and while many potential buyers are married couples, some unmarried couples consider taking this significant step as well. Whether you’re purchasing a fixer-upper house or a modern condo, you and your partner should consider the following factors when buying a house together before marriage:

Financial Responsibilities and Contributions

It’s important that you and your partner discuss each other’s financial situation. Here’s a breakdown of key considerations in this area:

Individual Finances

Before diving into the homebuying process, you and your partner need to discuss individual finances and monetary health.This conversation should include an assessment of each other’s:

• Credit scores: Lenders heavily rely on credit scores to assess the creditworthiness of each individual applying for a loan. A higher credit score often translates to lower interest rates and more favorable loan terms, potentially saving you and your partner a lot of money over the mortgage’s lifespan. You may consider applying for the loan together if you and your partner have similar credit scores. However, if one of you has a lower credit score, the person with the better credit score can apply for the loan to help secure better terms and interest rates.
• Debt-to-income ratios: Another key factor in the mortgage lending process is the debt-to-income ratio — the amount of money you pay on debts every month divided by the gross monthly income. The debt-to-income ratio helps determine your loan qualification and the total possible amount of the loan. Lenders generally favor a lower debt-to-income ratio since it indicates that you’re more likely to manage your monthly payments effectively and less likely to default on your loan. Just like with credit scores, discuss whether both ratios are good enough to apply for a loan together, or whether it’s best if one person applies for a loan to secure better terms and interest rates.
• Personal savings: You should also discuss each other’s personal savings to better plan for unexpected expenses during the homebuying process. Whether covering a sudden repair, managing a temporary loss of income, or contributing to a larger down payment, having a clear picture of each other’s savings allows for more informed decision-making and effective financial preparation.

Joint Finances

Once you and your partner establish the individual finances, the next step involves making a plan for joint finances. This plan may include creating a joint bank account for shared expenses and outlining financial goals as a couple, such as home improvements, future investments, or even long-term financial objectives like retirement.

You should also discuss how much each person will contribute towards the down payment, mortgage payments, and other related costs. This could be an equal split, or it could be proportionate to each person’s income. Consider having a written agreement outlining these details to avoid any potential disputes in the future.

Who should claim the house on taxes if unmarried? Unmarried couples can’t file joint tax returns, meaning only one of you can deduct the mortgage interest from your taxes. Talk with a tax consultant to discuss the best course of action for this situation.

Mortgage Responsibilities

Mortgage responsibilities are another crucial aspect to consider. You should determine the type of mortgage that best suits your financial situation, taking into account factors such as interest rates, loan terms, and down payment requirements.

Also, communicate openly about how you and your partner will handle mortgage payments, whether they will be split evenly or based on a percentage of individual incomes. If both names are on the mortgage, you and your partner are equally responsible for making the payments. If one person fails to contribute, the other is still legally obligated to pay the full amount. This could impact your credit score and future borrowing capabilities.

Home Expenses

Owning a home involves several expenses beyond the mortgage, including property taxes, homeowners insurance, utilities, and maintenance costs. It’s important to discuss who will be responsible for these expenses and how they will be split. You may contribute to a joint fund that covers household costs or divide responsibilities based on individual finances. Whichever approach you and your partner decide on, ensure that you reassess the budget and make adjustments periodically as needed.

Legal Considerations

When buying a house before marriage, it’s not just the financial aspects that need careful consideration. Legal factors, such as property ownership and legal agreements, also play a significant role in this process.

Property Ownership

When closing on a home, there are a few ways to hold title to a property, including:

• Sole ownership: Only one person owns the home and is listed on the deed, a written document that shows who owns the property.
• Joint tenancy: In this arrangement, you and your partner own equal shares of the property. If one of you passes away and you’re unmarried, the property must go through probate — the legal process of settling a deceased person’s estate. However, you may be able to avoid probate if you have a revocable living trust. This legal document gives someone else the power to make decisions about your money or property.
• Joint tenancy with rights of survivorship: This arrangement is the same as a joint tenancy, but when one of you passes away, the survivor automatically receives the other’s share of the property without going through probate.
• Tenancy in common: In this arrangement, you and your partner are on the deed, but you’re allowed to own a different percentage of the property rather than a 50/50 split. Just like with joint tenancy, the property goes through probate if one of you passes away and you’re unmarried.

These ownership options can be tricky to navigate, so it’s best to consult professionals, such as financial advisors, estate planners, and tax consultants, to see which choice is best for you and your partner.

Legal Agreements

Having legal agreements in place helps clarify expectations and protects both you and your partner’s interests. Here are some legal documents you may want to consider when purchasing a home before marriage:

• Cohabitation agreement: This legally binding contract outlines each partner’s financial responsibilities, including mortgage payments, property taxes, insurance, and maintenance costs. It can also detail how the property will be split if the relationship ends.
• Will or trust: If you’re buying a house before marriage, it’s important to update your will or establish a trust to ensure your wishes are carried out in the event of a loss of life. As mentioned earlier, a revocable living trust can help avoid probate and provide a smoother transition of property ownership.
• Beneficiary designations: Consider reviewing and updating your beneficiary designations on your life insurance policy and retirement account to align with your homeownership arrangements.

Before entering into any legal agreement, it’s advisable to seek legal counsel. A lawyer can help you understand the implications of these agreements and ensure they’re drafted in a way that protects your and your partner’s interests.

Planning for the Future

It may not be the most romantic topic, but it’s important to discuss what would happen to the property in the event of a breakup or a loss of life. Will one partner buy out the other’s share? Will the property be sold and the proceeds divided? How will the division of assets be handled? These are difficult questions, but addressing them upfront can prevent future disputes and financial hardship. As discussed in the previous section, a cohabitation agreement or an ownership agreement can help outline these exit strategies.

If marriage is a possibility in the future, ensure that your wills, beneficiary designations, and agreements are updated to reflect your new marital status and any changes in property ownership. It’s also important to note that in some jurisdictions, getting married can alter the status of your property. For example, it may become community property, where both partners have equal ownership, regardless of who initially paid for it. In the event of a divorce, this change could affect how assets and debts are divided. Before getting married, make sure to discuss these potential changes with a lawyer.

Conclusion

Purchasing a house as an unmarried couple is a significant financial decision, so it’s important to take these steps to protect your investment and relationship. When applying for a mortgage, most lenders require you to have homeowners insurance. Consider Mercury, where we offer cheap homeowners insurance without compromising quality. Talk with a local agent today to discuss the benefits of homeowners insurance and how we can customize a policy tailored to your needs.

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