Pros & Cons of Buying a House Together Before Marriage
It’s not uncommon to find couples buying a house together before marriage. Especially as people grow more comfortable with living together before marriage. According to a National Association of Realtors report, unmarried couples comprised 9% of homeowners in 2021.
Most unmarried couples consider buying a house together a natural step in the relationship’s progression. While the decision is often exciting, is purchasing a home together before marriage a good idea?
Assuming you marry in the long run, it is a plus. What happens when you break up? Trying to untangle finances can be very stressful unless you take measures to protect yourself when you break up. Some steps you can take include being honest about your financial situation to each other and your lender lenders. Additionally, it’s smart to determine terms of ownership, and having a contingency plan.
Before deciding whether to buy a house together without being married, it is important to consider the pros and cons.
Pros of buying a house together before marriage
It’s an investment: Homeownership is the most effective way to build long-term wealth. If you pool resources to buy a home, you start building equity sooner than if you wait until you are married. When you accumulate enough equity, you can borrow from it as a loan to finance a home improvement, buy a second home or invest in other assets. You can also decide to sell your home for a profit and use the money to pay for a bigger house.
It provides a sense of independence: Buying a home brings a sense of freedom because it is a milestone that most people look forward to.
Shared financial burden: Buying a home is a substantial financial undertaking. However, when two people come together with different incomes, it’s easier to save for the down payment and afford the monthly costs associated with home ownership.
You can qualify for a more considerable mortgage: Most lenders consider your combined income and savings when applying for a joint loan. Your combined income can help you be eligible for a more considerable loan amount. However, your credit scores also matter.
Even if one of you has a higher score, the lending decision will be based on the lower score. Thus, it’s better if the one with the higher score applies for the mortgage alone, even if it means qualifying for a smaller amount.
Cons of buying a house together before marriage
If you break up, it can be stressful and a hassle to untangle finances. Therefore, you must create and sign a cohabitation agreement or other legal contracts as a contingency plan if you break up. Failure to do so will mean relying on state laws to handle the property.
The process can involve going to court, selling the property, and dividing the proceeds after repaying the mortgage and other costs. However, you can also resolve the issue without going to court.
Lesser tax advantage: While tax laws are subject to change yearly, currently, if a married couple buys a house and files taxes together, tax benefits are available. In contrast, when two unmarried people buy a house together, only one will benefit from that tax break. Thus, it may leave you vulnerable when someone decides to walk away.
Taking legal action to hold the other person accountable for their share of the mortgage may also incur significant costs. Until the matter is resolved, you may be stuck paying 100% of the utilities and other expenses.
No set rule for equitable division: If a marriage ends, parties have more legal protection. There are laws in place that require equitable division of assets during a divorce. In contrast, few laws exist to protect unmarried couples who break up.
Is there a right way for unmarried couples to buy a house?
If you are determined to buy a house despite the cons, you can mitigate the risk in case of a breakup by taking certain actions. They include the following:
Know your partner’s financial situation and agree on financing: You must know about each other’s assets, debts, and spending habits. Why is this important? Any judgment against one partner can be recorded against the house.
For example, suppose one fails to pay a debt, and the creditor sues and wins the right to place a judgment against their assets. In that case, the assets may include your home, meaning that you cannot sell or refinance it until the debt they pay off their debts in full. Or judgment is removed after filing for bankruptcy.
In the worst-case scenario, especially if the state law doesn’t consider your home an exempt property, they could force the home’s sale to collect the debt.
Decide how to hold the title (type of ownership on the deed and title): Will one person own the title? Or will it be a joint tenancy or tenancy in common? What happens when one of you dies? Does the other party become the sole property owner, or are their other named heirs? For such a significant financial undertaking, seeking legal advice is crucial. Consult lawyers about how to document ownership and financing details.
Create a cohabitation agreement: This legally binding document details how you will divide property and other assets in case of a breakup. It spells out how much each partner will contribute towards the mortgage, utilities, and other household expenses.
It can also include buyout terms in case of a breakup. Exit strategy if one partner wants to sell and dispute resolution process. Yes, it does not sound romantic at all. However, it’s practical. You can also use it as a litmus test to gauge whether you are ready to own a home. If you cannot agree to this document, you may not be ready to own a home.
Buying a home is the most significant financial commitment you will ever make, regardless of marital status. It’s also risky when you do it with someone whom you don’t have a long-term commitment with. However, if you decide to do it, remember that you may have fewer legal protections if the relationship ends. So, ensure you take all the necessary steps to protect yourself against any eventualities. If need be, do not hesitate to seek expert advice.