How to Buy a Home Before Marriage

How to Buy a Home Before Marriage

Are you considering buying a house during your engagement? You’re not alone. Many couples believe that a home purchase should take place before marriage.

One in four couples between the ages of 18 and 34 bought a house together before the wedding.

Understanding the home buying process is important, and equally, as important is understanding how to buy a house prior to the wedding! 

Common Home Buying Questions When You’re Engaged/In A Relationship

·       What are the differences?

·       How do you take title?

·       Legal Implications?

·       What happens after we are Married?

A home, and a diamond ring, two of the larger purchases you will make in your lifetime. You’re going to spend a lot of time searching for both, and you’ll want to do everything you can to protect your investments.

Some of the best reasons to buy a house are low mortgage rates, rising rental prices, tax breaks, and building equity. Buying a home at an early age is a great move because you can start building your equity right away, and likely benefit from additional appreciation.

If you’re buying a home before you are married you will want to: 

  • Understand how mortgages work
  • Compare your Assets, Credit, Income and Debts
  • Open a joint bank account
  • Decide how to manage costs
  • Put the agreement in writing 
  • Title it right 
  • Prepare for the Worst

Understanding How Mortgages Work

If you’re buying a home before you’re married, you will want to:

·       Learn how Mortgages work 

·       Apply for a mortgage

·       Ask questions around how marriage impacts your mortgage

Unmarried couples purchasing a home will have both pros and cons. If you’re not yet married, you will be viewed as two separate individuals (though you can buy the home together) and this creates additional flexibility for the both of you. This flexibility may play to your advantage, and it may not. Here’s what the lending institution will look for:

ACID (Assets, Credit, Income, Debts)

One of the best ways to know how to position yourself for a mortgage qualification is the ACID test (see ACID test). Knowing how your profile stacks up, and how banks will look at you as applicants will help with your mortgage approval.

Assets

Your assets (down-payment) are one of the first things a bank will look for. Can you afford the down-payment on the home? The less you put down on the home the higher your Debt-to-Income ratio is going to be since your monthly recurring debts will be higher. You and your partner should discuss the number you feel comfortable putting down on the house before you go into the home purchase.

Credit Scores

One of the biggest factors in determining whether or not you qualify for a mortgage, as well as what your interest rate is going to be, is your credit score. You should have a good understanding of your partner’s credit score when buying a home. Their creditworthiness is going to play a factor in your home purchase. If your spouse has a poor score it could negatively impact your ability to buy a home before you are married.

This can work to your advantage in some scenarios if you’re buying a house as an unmarried couple. If the person with stronger credit purchases the home you can secure a better interest rate. If you’re married then you are likely to be viewed as a single unity by the lending institution.

The flip side of this option is now you will only have one income on record, so the amount you qualify for is likely to be lower. Only one person’s name will be on the loan and deed in the event you decide to put only one person’s name on the loan.

Income + Debts

Debt-to-Income ratio is a math equation lending institutions use to determine your ability to solidify a mortgage.

Your income will play a big role when you go for a mortgage approval because it impacts the DTI (Debt-to-Income equation). Unmarried couples buying a home will likely be viewed as two separate individuals, with two separate incomes and recurring debts. As we said above, if your partner has a low credit score you may want to see what your interest rate options are if only one person buys the home. Over thirty years those points matter. Also, if one partner has a lot of debt, and very little income, it could have a negative impact on your ability to obtain a loan.

Monthly recurring debts are the second part of the equation. All monthly recurring debts are factored into the equation (though some may be excused if they are to be paid off in the next 4-6 months). Some typical recurring debts are your car payment, student loans, business expenses, etc.

Open a Joint Bank Account

When buying a home as an unmarried couple you will want to consider setting up a joint bank account, if you don’t already have one. This account can be used to pay the mortgage, property taxes, insurance and maintenance on the home.

Setting up an auto-deposit plan for this account, with certain funds from your income will help to ensure that neither party forgets to make payment. This joint bank account will help simplify the payments, expenses, and all budget tracking associated with the home.

Managing Expenses

One reason you will want to have a joint bank account is so that you can manage all expenses that relate to the property. This is a great way to track home expenditures, keep everything fair, and an easy way to show home costs on your taxes.

Cosigning on a mortgage makes you 100% liable for the debt, which means that should your relationship end, and your partner stops paying, that you will need to assume the entire obligation. This is why a lot of financial planners will recommend buyers to shop in a price range they can afford on one income.

Put Everything in Writing

Preparing a written agreement can help avoid a lot of unnecessary confusion and frustration. Have an attorney draft a document that puts the property partnership into an agreement with details that lay out each partner’s responsibility. This way you can point to the agreement should there be any source of conflict on who is responsible for what.

This agreement will help you prepare for the worst should there be any unexpected deaths or even a severance of your relationship. What happens in this event? Having the joint bank account, and putting an agreement together, can save you a lot of headaches in the event something tragic happens.

Title your Home Right

How you take title matters, and it’s different for every state. It’s important to know how your options when taking the title in your home, especially as an unmarried couple. You will want to know the impact your marriage will have in your title as well.

How you can hold title in Florida.

Since I am a Realtor® and not an attorney, you should understand this information is from a Realtor’s perspective.

The way in which you hold title to your home is going to have legal, tax and estate planning ramifications, so consulting with an accountant and attorney makes sense.

Here are some ways that you can determine the best ways to hold title as an unmarried couple:

Prior to closing, a homebuyer who is purchasing property in Florida must consider numerous matters. One extremely important matter, which is often not given enough consideration, is determining how to "take title" to the property. In other words, many types of property ownership exist, each with unique benefits and drawbacks.

Factors such as asset protection, taxation and estate planning-needs must be considered before choosing the best way to take title to the property. Various ways in which a buyer of a Florida home may take title to property are described here.

Single ownership:

Title to real property can be taken in a person’s own name, which is generally referred to as sole ownership. Unmarried persons, legally divorced persons and married persons who wish to hold the property in their own names may use this form of ownership.

However, if a married person takes the title in his or her own name, at the time he or she resells the property his or her spouse will have to relinquish his or her rights to the property due to Florida’s homestead laws.

A person can also take title to the property in the name of a living trust, which is commonly known as a revocable inter vivos trust.

Joint ownership

If a person is purchasing the Florida property with other persons, they can take title to the property as Tenants in Common. As Tenants in Common each joint owner of the property has the right to sell, lease or bequeath their interest in the property to his or her legal heirs. In Tenancy in Common, any number of individuals can hold title to their respective share of the property, depending on their contributions.

A person purchasing the Florida property with other persons can also take title to the property as Joint Tenants with the right of survivorship. Under Joint Tenancy all joint tenants have equal possession rights to their respective share in the property. In addition, due to the right of survivorship which is not present in Tenancies in Common, when a joint tenant dies, by operation of law his or her share is automatically distributed among the remaining joint tenants. There are no restrictions on the number of persons that can be joint tenants under a Joint Tenancy.

Similar to Joint Tenancies is the Tenancy by the Entirety, which is for married couples who wish to hold a joint title in the name of both spouses. Under a Tenancy by the Entirety the property is equally held in the name of both the husband and wife. This title is applicable and available for married couples only. Both the husband and wife have equal possession rights to the property and similar to a Joint Tenancy when one spouse dies, his or her share is automatically distributed to the surviving spouse.

Other forms of ownership

Title to Florida property may also be held in the name of a separate legal entity organized under Florida state law such as a corporation or a limited liability company. Corporations and limited liability companies can have any number of shareholders or members, respectively, but the rights to the property of individual shareholders or members will be limited to the face value of shares or membership interests held by them.

Additionally, title to the Florida property may be held in the name of a partnership of two or more persons. If the title is taken in the name of a partnership it will be held in the name of the partnership, with the partners having an equal right to possession of their respective share in the property.

Finally, the title may also be held in the name of a Florida Land Trust, in which the legal title of the property is transferred to a trustee for the benefit of the named beneficiaries. Some people prefer to take the title in the name of a Florida Land Trust because it offers privacy with no one knowing the beneficial owner of the property or the amount of the purchase price paid for the property.

Prepare for the Worst

Preparing for the worst is something you should do in every situation, especially when you’re buying a home. There are so many financial ramifications involved that you have to prepare for the worst to protect yourself and your spouse.

Discuss options and scenarios when it comes to death or severance of the relationship. Joint tenancy provides the right of survivorship. If your relationship ends, what happens at that point? Having this plan in place is not an easy conversation to have, it’s a necessary one, though.