Author: Nick Prigitano
Buying a home is an enormous financial decision. How much should you put for a down payment? How long should the loan be for? What is the interest rate? The list goes on and on. A home purchase is a complex financial decision for married couples, and more so for unmarried couples. If you're in a situation where you're considering buying a home before saying "I do", here are a few considerations before you pull the trigger.
Get something in writing
Whether it's the enchantment of new love, the excitement of buying a home, or the nerves of taking this next big step, the possibility of breaking up can seem nothing short of blasphemous. When Cupid has you in his crosshair it can be hard enough to focus on the daily demands of life, let alone the laundry list of items that go into buying a home. But it's critical to break out of the spell, at least temporarily, in order to reduce the financial repercussions if the unthinkable happens.
Before signing the mortgage document, it's suggested to first formulate a co-ownership contract or revocable trust with a qualified attorney. It's best to do this right away because presumably, if you're buying a home together, the relationship is in good shape. Since unmarried couples do not have the same legal rights to property in the case of splitting up, this agreement will outline the rights and responsibilities of each party for various situations. This goes beyond breaking up - the legal document should also include situations where one party dies or becomes disabled, as well. It should also outline the responsibilities of each party, including how the mortgage, taxes, bills, and repairs are to be handled. Having a written document is a safeguard to both parties in the case the relationship doesn't work out or tragedy strikes.
The legal document should also consider what rights each person has if one wants to sell the home. Often there is language that would provide the opportunity to the other to buy out their stake before being forced to sell the place.
What if you're planning on getting married?
Even if you're engaged and you can all but hear the church bells ringing in the distance, the prudent financial planning decision would still be to get a legal document written. Although it's unfortunate that some engaged couples break it off before marriage, it does happen. It's best to draft the legal documents when both individuals are composed than when the relationship is on the rocks and the couple can barely speak to one another.
What about taxes?
There are additional tax benefits for homeowners, although their impact has been limited for many since the tax law changes in 2018. One benefit is the ability to deduct mortgage interest on up to $750,000 of debt. But who gets to claim this interest deduction? This is something that should be addressed in the agreement. Although with the increased standard deduction fewer taxpayers are able to itemize, which limits some tax planning opportunities.
An interesting benefit of being unmarried is that each individual is allowed their own $750,000 debt limit on interest. For an expensive home, which is not all that uncommon in places like California, Massachusetts, and southern New Hampshire, an unmarried couple can effectively double the limit ($1,500,000 for $750,000 each) of debt for deductible mortgage interest. While most people won't take on that much debt to buy a home, if they do, it's something to consider when deciding how to allocate the mortgage interest deduction.
What if only one person buys the home?
When only one person buys the home, it simplifies many things but complicates others. In one sense, it makes things simpler because presumably only that person will be on the mortgage and title of the home. This may avoid the need to have a formal contract in writing between the couple. However, there are significant estate planning considerations if the owner were to pass before their significant other.
Unless the property explicitly goes to their significant other in their will, they may be left without the option to stay in the home. One way to avoid this is to title the home in a trust. The trust document would detail who is to inherit the home and how. If the other person is not included in the estate planning documents, they may be inadvertently disinherited and left without a place to live. It’s important to make sure your estate documents are up to date and that your other half knows what will happen if you pass away before them.
Another consideration, if you need to buy out heirs if you wish to stay in the home, is to purchase life insurance on the owner. This way if the owner dies you would receive an influx of cash to facilitate a buyout if that's something you desired. In these instances, we typically suggest buying term insurance because if you get married, split-up, move out, or a variety of other circumstances where life insurance is no longer necessary, the insurance can be dropped without a surrender charge. Term insurance also costs less than permanent (whole-life) insurance.
Whose name should go on what?
This is another complex issue that unmarried couples need to answer. This is especially true if one has a higher income, or a better credit score. It's no surprise that the interest rate you'll get depends heavily on the credit score of who is on the mortgage. However, ownership is determined by who is listed on the title. If only one person is on the mortgage, but both are on the title, the one on the mortgage is legally bearing the financial risk while splitting the financial asset. This is another reason why it's so important to have this ironed out in writing before purchasing the home.
Other estate planning considerations
While it can be straight forward whose name goes on the title when one person buys the home, there are options when two people go in on a property together.
1) Joint Tenants with Rights of Survivorship (JTWROS)
In this instance both individuals are considered equal owners. Therefore, if one passes away, the other would inherit the property. However, it is still important to have a co-ownership agreement that outlines the responsibilities and rights of each person. Especially if one individual wants to buy the other out of their ownership stake if the relationship fails.
2) Tenants in Common (TIC)
Tenants in Common can be especially useful if one person contributes more to the purchase, which is common if someone earns more than the other. This titling allows for unequal ownership between the couple. However, it can get tricky if someone dies, because the property does not automatically transfer to the other owner like JTWROS. It transfers to each owner’s next of kin. It's important to discuss your wishes for how you want your share to pass with your estate planning attorney to make sure the legal documents match what you want.
3) Revocable Trust
A revocable trust should be set up by an estate planning attorney, and that can be expensive. However, this option can provide the most protection and flexibility to both parties. The trust document can detail exactly what happens in a variety of circumstances.
It's becoming more and more common for couples to purchase a home before getting married. Whether it's younger couples who are getting married later in life, a second relationship after a tough divorce, or someone in the LGBTQ community who has decided not to marry, there are many instances where buying a home may come before marriage. While buying a home is an exciting time for a couple, it's critical to consider the financial planning implications before doing so. Otherwise you may leave yourself financially exposed if the relationship goes sour.
For additional questions about unmarried couples buying a home, we suggest working with a qualified financial planning professional.