If you are beginning a new chapter in your life with a new partner, managing money may be the last thing on your mind. But it should be one of the first things you both consider as you begin to direct your separate finances into a mutual plan for the future.
For example, buying a house together before getting married may seem like a good idea, yet there are pros and cons to consider. Buying a house is often the most important, and largest investment individuals make. However, for two unmarried people who plan to be married, untangling it all if the relationship ends can be especially complex and problematic.
So, couples would be wise to compare the cost/benefit of renting as opposed to buying before taking this step. Deciding whether to buy now or wait until after marriage involves a good understanding of the legal ramifications of buying a house together, and a thorough evaluation of the couple’s finances.
Start at the beginning
Buying a home is a big step and involves a significant process. I advise couples embarking on this path to first sit down together and thoroughly discuss general finances with each other. Share all your financial facts and figures: such as earnings, savings and debts. In addition, talk about how you each feel about setting up a budget, paying the bills and managing your bank accounts as a couple. It might be informative to actually create a spread sheet with all known or anticipated expenses just to get a glimpse of what’s ahead and how you each component being handled. Be as thorough as possible. Explore each other’s financial knowledge and philosophies as you go.
For this exercise, an important goal will be to see if you can afford a home purchase. Don’t forget that owning a home costs far more than just the mortgage payment. There is the substantial down-payment; homeowner’s insurance, possibly flood insurance and mortgage insurance; property taxes; maintenance and repairs; all utilities; lawn care and landscaping; homeowner’s association fees, and likely other expenses.
Check your credit scores
Take your financial intimacy one step further by examining your credit reports to determine your joint creditworthiness. Credit scores for both people will help determine the mortgage rate, and even whether or not you can get a mortgage. The scores also impact how the property is best titled.
If one of you has a low credit rating
Usually creditors consider married couples to be one unit. But they see unmarried couples as individuals, even if they are applying for the loan together. A low score for one of you could determine whose name appears on the title. However, with only the name of the person with the good credit rating on the title, that leaves the other person in jeopardy in case of a breakup. If the lower score is removed from consideration, you can get a better mortgage rate, but may only be able to qualify for a lower amount than you could have with two incomes.
Title to the house
The title to the house can be held as property in one person’s name as sole owner, or both of you can hold title as joint tenants or tenants in common. In most cases, a couple will want both names on the title, since leaving one person off leaves that person with no legal ownership.
As joint tenants, a couple owns the house with rights of survivorship, so that if one dies, the other inherits the partner’s share of the house. And if the relationship fails, each individual would have the right to half the value of the property.
As tenants in common, each tenant owns a percentage of the house as specified in the deed. If one owner dies, his or her percentage of the house is not automatically transferred to the partner unless so specified in a will. Without this specification, the deceased owner’s heirs will inherit the share.
It’s a business deal, so put it in writing
Have a real estate lawyer prepare a contract defining the details of your arrangement. Include the percentage of the house owned by each partner, as well as whose name is on the deed, who paid how much toward the down payment, and what should happen in case of a breakup.
The agreement should go as far as determining what will happen if one party cannot pay. Will the other partner cover the mortgage payments by means of a personal loan to the person who cannot pay? How will the loan be collateralized? Making these difficult decisions now saves time and grief in case problems arise later.
Buying a house after marriage
It’s probably a good idea NOT to buy the most expensive house you can afford. Instead, take the long view, keeping in mind that jobs are not guaranteed. Consider how difficult it would be to pay the mortgage if one of you lost your job. Buying a house you could pay for with one salary will avoid problems if one of you is not working for a while.
Again, putting both names on the deed is the optimum direction for equal ownership and shared responsibility. Being joint tenants protects the surviving partner in case of death and protects both parties in case of divorce.
In Texas, any house purchased during marriage is community property. If only one name is on the deed, the other spouse still has an interest in the property due to community property laws.
Getting help with the details
With careful financial planning for decisions like this during the early stages of establishing a life together, a couple can build a financial foundation that will provide significant benefits for a lifetime. For help with this and other financial planning concerns, contact me at 832-858-0099.