Key considerations for unwed couples buying a home
Married couples represent the majority of homebuyers, but more couples are teaming up to buy a home before they get hitched. If they ever do.
Data from the National Association of Realtors show that, on average, married couples accounted for 61.6 percent all homebuyers from 2001 to 2011. By comparison, unmarried couples made up an average 7.5 percent.
Although still a small slice of homebuyers, some unwed couples see positives to buying a home together before getting married.
Teresa Hung, a customs broker in Baltimore, decided to put off getting married in 2012. Instead she chose to buy a home with her boyfriend, James Woody, a retail executive. The couple wanted to take advantage of still-affordable home prices -- rather than splurge on a wedding and continue paying rent for months or years.
"I did want the wedding and all that," said Hung, 29. "It definitely wasn't an easy decision."
Here are some tips unwed couples should follow when they commit to buying a home:
1. Swap financial history
Before considering buying a home with your significant other, share all of your key financial statements. That includes bank accounts, credit cards, student loans, retirement accounts and so on. Also share credit reports and FICO scores.
You'll need to know of any credit blemishes that could prevent you from obtaining the lowest rate on a home loan, or other potential red flags, such as a high debt-to-income ratio.
2. Agree on what you can afford
Before you hit the first open house, determine how much each person can contribute, especially if you opt to apply for a home loan together. Bankrate Inc. offers online calculators to help estimate how much you can afford based on your income and expenses, e.g., http://apne.ws/12bNGkc.
One rule of thumb: a house payment shouldn't be more than 28 percent to 30 percent of a buyer's monthly income.
With an unwed couple, particularly if one person earns a lot more than the other, other approaches may be a better fit.
John Porter and his partner, Horacio Alonso, are in the market to buy a home in Miami together. The couple has already made it a point to benchmark how much home they can afford based on a percentage of their individual income.
"Our incomes are not equal," said Porter, co-founder of an organic cocktail mixers company.
He said splitting the costs of the home evenly would not be fair. As a result, the couple decided to base each person's contribution on 30 percent of their individual earnings, Porter said.
3. Sign a contract
Even if a falling out seems unimaginable, couples should enlist an attorney and draw up a purchase contract before buying a home.
Such a pact should outline details of how much each person is contributing, whether it's money, taking on a loan or paying to cover maintenance and other costs.
"It has to be very clear who is putting the money in, who is going to do the improvements, so they have a good understanding of ownership," said Monica Rebella, a certified public accountant in Tustin, Calif.
The pact also can set how the couple wants to split any equity gained in the home, for example.
The contract details can help sort out how much of a financial interest each person has in the home in the event of a split, which could lead the home to be sold or one person offering to buy out the other.
Such agreements don't have any effect if the couple remains together, notes Jordan Clarke, an agent in San Diego with real estate brokerage Redfin.
"Many different things can happen after the relationship dissolves," Clarke said. "It's much better to think about it when heads are cool and everything is great in a relationship."
4. Understand ownership options
Homebuyers have a couple of options on how to assign ownership on the title to the home. Specifics can vary by state, but generally the title can list one person as the sole owner, or more than one person.
Unwed homebuyers generally hold title as "joint tenants" or as "tenants in common."
The "joint tenants" option designates equal ownership interest. If a couple specifies right of survivorship to the title, then the interest in the home is transferred to the other person on the title in the event the other dies.
With a "tenants in common" title, the homeowners spell out what percentage of the property each holds. That approach is more common with a group of investors buying a property together because it clarifies how much each investor gets from the sale of the property. It also lets each person sell their stake in the property.
5. Review tax implications
One of the perks of homeownership is being able to deduct mortgage interest payments in your tax return.
In the case of an unwed couple filing separate income tax returns, the IRS will allow both to take their home mortgage interest deduction as long as they each have a vested interest in the property, said Mark J. Kohler, a tax lawyer and CPA.
A vested interest could be simply being on the title, or being a guarantor on the mortgage, akin to being a co-signer.
For more details, check out the IRS website: www.irs.gov/publications/p936/ar02.html.
6. Reset wedding expectations
Owning a home can come with unexpected expenses that make it hard to save money for a lavish wedding and honeymoon.
Hung, who is not yet engaged, said the biggest shock of homeownership came when her home's value was reassessed, resulting in an increase in her property taxes.
"It really does set your plans back," she said. "I thought within a year we would hopefully be able to afford a wedding, but it's not as quick as we thought."