Purchasing a home, much like a marriage, is an important decision that requires much thought and planning. Both home ownership and marriage require a significant investment of time and resources. Couples must consider these six financial implications when buying a house before marriage.
1. Up-Front and Future Costs of Buying a House Before Marriage
Couples contemplating the purchase of a home must consider the financial contribution required. What if one partner makes significantly more money? In this situation, a couple must decide whether they will be splitting the costs evenly or if one of them will be paying more.
Purchasing a home requires a significant financial investment. There’s the down payment, closing costs, mortgage costs, fees, maintenance, and the cost of possible renovations. Full transparency between partners regarding finances is essential to successful homeownership. After purchasing a home, couples must then consider future costs such as maintenance, repairs, and upgrades.
When buying a house before marriage, a joint bank account may alleviate the stress that comes with each partner having to remember to make their share of the mortgage payment. Opening a joint bank account will ensure that all of the money needed to pay the bills and the mortgage each month is coming from one account.
2. Marital Status and Applying for a Mortgage
The Equal Credit Opportunity Act (ECOA) views marital status as a protected class. Still, the ability to qualify for a mortgage is not affected by marital status. As loan terms and criteria are the same, couples applying as married or unmarried have the opportunity to obtain a mortgage based on income, assets, and credit score.
When applying for a mortgage, couples must consider whether the application will be a single or joint application. As banks generally consider both credit scores when determining the value of a loan and its interest rate, it is important for couples to be transparent with each other regarding individual finances. A partner with bad credit may put the couple in jeopardy when it comes to applying for a mortgage.
The Benefits and Risks of Filing a Single Application
In the event of one partner’s credit score being significantly higher than the other’s, couples have the option of filing a single mortgage application using the higher credit score. The higher credit score increases the chances of the applications being approved.
A single application will only consider the filing partner’s income as part of the debt-to-income ratio. However, in a single application, the filing partner is named the official owner of the house on the deed.
The Benefits and Risks of Filing a Joint Application
Couples filing a joint mortgage application may benefit from the use of both incomes, which could lower the debt-to-income ratio. A joint filing also potentially increases the loan amount, allowing for more options during the home search.
Filing a joint mortgage application could prove worrisome for couples with at least one low credit score. When considering a joint mortgage application, lenders will make a credit decision based on the lower of the two credit scores.
3. The Different Types of Mortgages
Once approved for a mortgage, couples considering buying a house before marriage must decide which type of mortgage best suits their needs. As the mortgage preapproval process may take anywhere from a few days to a few months, it is important for couples to research the types of mortgages that are available to them.
A fixed-rate mortgage is a mortgage loan that is fully amortizing, meaning the principal of the loan is paid down gradually over the life of the loan with an interest rate that does not change.
FHA loans are home loans that are guaranteed by the Federal Housing Administration (FHA). FHA loans benefit buyers by making homeownership more attainable. Some benefits of using an FHA loan include smaller down payments (as low as 3.5%), the option to use gifts as part of the down payment, and the chance to apply for a loan after a financial hardship.
VA loans are backed by the Department of Veteran Affairs (VA) and offer borrowers the ability to purchase a home with no money down. Active duty military (181 days or 3 months during wartime), spouses of military personnel killed in the line of duty, and those who have spent at least six years in the National Guard or Reserves are eligible for a VA Loan. Couples who meet this criterion may be eligible to use a VA loan to purchase a house before marriage.
Adjustable Rate Mortgage
An Adjustable Rate Mortgage (ARM) is a mortgage whose interest rate is affected by an economic index. With an ARM, changes in the index will periodically increase interest rates, possibly causing mortgage payments to rise.
Interest-only payments allow borrowers to pay only interest for a set period of time, usually five to seven years. Once this period ends, borrowers must pay a lump sum, refinance the home, or make payments on the principal amount of the mortgage.
4. Making A Sufficient Down Payment
The down payment is an essential part of the home buying process. Home buyers must budget for a down payment cost, preferably 20% of the cost of the home. Down payments below 20% require private mortgage insurance (PMI), which protects the lender from a borrower defaulting on the loan.
PMI payments are added to the monthly mortgage payment, usually a few hundred dollars each month. Homeowners making PMI payments may request that their lender remove the PMI once the home reaches 20% equity.
5. Home Ownership Property Rights
Unmarried home buyers must decide how they will divide ownership of the property. Here are some ways that couples may record title.
Also known as ownership in severalty, sole ownership gives a single individual complete ownership of the property. As a couple, one party must agree to relinquish their ownership interest in the property by signing a quitclaim deed.
Joint tenancy is used by co-owners of a property to establish title and own equal shares at the same time. Through joint tenancy, the surviving co-owner of a property is granted full ownership in the event of the death of their partner.
Tenancy in Common
Tenancy in common gives each owner of the property the opportunity to sell or take a loan out on their share of the property without notifying the other owners. This method is best used by co-owners sharing the title, particularly unmarried couples. A tenancy in common gives co-owners the right to designate heirs to their percentage of the property rather than transferring directly to the co-owner.
When You’re Ready to Purchase Your Home
There is no right or wrong answer about whether buying a home before marriage is the best time to do it. The home buying process takes a great deal of research and preparation. Clever Partner Agents can help unmarried individuals navigate the home buying process, saving them time, money, and stress. Contact us today to learn more.