ADVICE TO THE UNMARRIED COUPLE BUYING A HOME
It’s more complicated than you think.
Jack and Diane have been a couple for years. In the beginning, they each had their own apartment, with their own furnishings, kitchen ware and stuff. On occasion, one would stay overnight at the others place, but that became the norm when Diane bought a toothbrush for Jack as a joke. Soon the conversation turned to the money they could be saving if they lived together, and they signed their first lease together. It was great. Living together, they learned more about each other. She learned that Jack was not good with tools or fixing things, but that was alright because she was handy like that. Diane couldn’t boil water without burning it, but Jack was a pretty good cook. They made it work. The apartment was mostly furnished with her belongings, and most of his stuff went directly to the attic. His desk, two short filing cabinets with a door over the top, and his book shelves which involved cinder blocks, did not make the trip. Even so, the apartment was cramped and they began picking up the real estate magazines at the entrance to the Pig. That quickly segued into calling me to help them find a house. I’m a Coldwell Banker Residential Broker, working as a partner in the Stallings & Smith Group.
We went through all of the agency paperwork, standard advisories and the buyer’s representation agreement, when I realized their last names were different and that neither wore a wedding band, which these days…you know, so I asked. Coming from a background in the practice of law, I thought aloud that if some 50% of all marriages end in divorce, the statistics for unmarried couples separating had to be way higher. One need only count extended relationships with past girlfriends that didn’t make it to the alter. Buying a house together is a big deal, so I gave them some things to think about. In South Carolina, while there is Family Court and a large body of law to sort matters out for a divorcing couple, being married is your ticket into Family Court. An unmarried couple who combine their resources to buy a house are left with a partition action in Common Pleas Court, where the result might be the same, but without an agreement by the parties, there might not be a decision for a couple of years. During that time, assuming one of them moves out, their investment will be tied up in the house, and with their name on the Note for the house occupied by the ex, that partner will be unable to get a loan for another house and his credit will depend on the occupying partner faithfully making the payment. That is the best case scenario. It can get much worse. So here is what I told them.
Transparency: I figured they both had decent credit to qualify for the apartment lease, but buying a house is taking your finances from the minors to the majors and everything must be in order. Income, assets, debt and other liabilities have to be put on the table. Getting a good rate and a lower monthly payment depend upon it, and when the mortgage lender runs that credit check, the balance on her credit card and the delinquency on his student loan is going to come out anyway.
Agree Now, Before You Can’t Agree on Anything! This house will probably be their biggest asset and their largest debt. A Partnership Agreement that will become a single issue Prenuptial Agreement if they later get married, is legally binding will protect them both. It should address their financial responsibilities relative to the house, to include the mortgage, taxes, insurance, homeowner association fees, utilities, in fact it should cover every shared expense they can anticipate. Who pays for what, and if they later sell the house or the relationship fails, what happens? What if either party is no longer able or willing to meet their financial commitment, what happens? If that monthly house payment is not made, it will impact both of their credit scores, and it will follow them for a long time. The Agreement settles these disputes before they happen.
Title: Across the country, the title options vary from state to state, but generally it boils down to (1) Tenancy in Common is the most typical, which is a 50/50 ownership unless it provides for other percentages because of differing financial contributions. Upon the death of a partner, their share must be included in their probate estate, and for that reason, a Last Will and Testament is also a good idea. Without it, the survivor would be naïve to believe that the deceased’s share will pass to them, and not to heirs at law; (2) Joint tenants with rights of survivorship provides that you own the property equally and have equal rights to use of the entire property. Immediately on the last breath of a dying partner, title passes to the survivor, without passing through probate; (3) Sole Title places full ownership in one partner. Again, get a Will. Sole title situations usually involve one party having poor credit and the bank requires it, or only one person is buying the house. This will not necessarily obviate the need for an Agreement, since the other partner will likely contribute financially or by sweat to attain a claim to some equity in the house, or at least make that claim when the relationship sours. Title will also affect how the mortgage interest deduction will be handled on tax returns.
Keep Records: They could become important later, as in when one partner advances money for an improvement to the house, with the understanding that he will be reimbursed by the other. When the house is sold, it may be the only way to adjust the sales proceeds at the closing table.
Things change and it is a good idea to be sure that any Agreements and estate planning reflect the current state of affairs and current intentions. Jack and Diane probably ignored the advice I so thoughtfully imparted, but there was a happy ending. I sometimes see them at church. They married very soon thereafter and they are raising two healthy children in the house I found for them.