Yahoo Finance I’m an Attorney: Why You Should Think Twice About Buying a Home With Someone Before You’re Married
According to Quicken Loans, since 2013, there’s been a sharp uptick in the trend of couples buying houses before getting married. While getting an early jump on building equity can be a proactive step toward financial freedom, the strategy has several downsides that can’t be ignored.
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“Buying a home with someone before marriage presents unique challenges from a legal and financial perspective,” said Marty Burbank, an elder law and estate planning attorney and the founder of OC Elder Law in Orange County, California.
Here’s a look at the potential downsides.
Unmarried Couples Lack Important Legal Protections
If you’re planning on getting married, you’re probably not planning on breaking up — but you might. And if you don’t wind up walking down the aisle, a shared property can become a legal minefield.
“The laws that require an equitable division of assets during a divorce are practically nonexistent for unmarried couples who break up,” according to Quicken Loans.
That can make for an ugly and financially disastrous parting of ways.
“I’ve seen many clients struggle with the absence of legal protections typically afforded to married couples,” Burbank said. “This makes essential legal instruments like cohabitation agreements or property agreements vital to clearly define ownership rights and responsibilities. Without these, each party might face significant legal battles or losses if the relationship dissolves.”
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Mismatched Credit and Debt Can Make Borrowing a Challenge
Unmarried buyers can secure a mortgage through either a single or joint application. The latter gives more buying power to couples with two incomes — but only if they have comparable credit histories.
“When it comes to obtaining a loan, mixed credit profiles can lead to complications,” Burbank said. “In my experience, one partner’s poor credit score can adversely affect the couple’s loan terms, increasing interest rates or resulting in loan rejection.”
According to Quicken Loans, lenders approve joint borrowers based on the lower of the pair’s credit scores. That means it could make sense for the better-qualified partner to apply as an individual to secure a better rate — but that diminishes purchasing power and puts all the responsibility on one party while taking property rights away from the other.
“It’s crucial for couples to evaluate their financial standings individually and consider consulting with a financial advisor to understand the best path forward, whether that means improving credit scores before applying, or possibly having one partner apply individually,” Burbank said.
Dividing Equity After a Sale Can Be Challenging
Depending on whether one or both parties secure the loan, unmarried couples can structure ownership rights through sole ownership, joint tenancy or tenancy in common — all of which can spell trouble for one or both people when it comes time to cash out.
“Regarding equity division, my experience has taught me that without marriage, complexities in asset division can escalate quickly when a relationship ends or when deciding to sell the property,” Burbank said. “Drafting a clear, legally enforceable document that outlines each person’s contributions and how proceeds will be divided upon sale can prevent many legal conflicts. This should be done with the assistance of a legal professional to ensure that all parties’ interests are protected.”
Taxes Can Get Complicated and Costly
“Filing for the mortgage interest deduction when you’re an unmarried couple can get complicated,” according to Quicken Loans, because, among other things, both partners must itemize instead of taking the standard deduction for either to qualify.
But that’s just the start of IRS headaches that unmarried couples who own a home together encounter.
“Tax implications are another critical area,” Burbank said. “For unmarried couples, who owns what and how much each contributes can affect how things like mortgage interest and property taxes are claimed, potentially leading to audits or additional liabilities. Proper documentation and potentially seeking the advice of a tax professional can help mitigate these risks.”
If you’re cohabitating while unmarried, you’ll have to include a statement to the IRS with your returns explaining how you divide your mortgage interest and tax obligations. That — along with diminished capital gains deductions if you sell before you tie the knot — means that married homeowners usually come out on top at tax time.
Misaligned Financial Goals and Plans Can Make the Home — and the Relationship — a Burden
According to Forbes, money problems are one of the top contributors to America’s 50% divorce rate — and that’s just for first marriages. Subsequent nuptials are even more likely to end early.
But those who say “I do” to a mortgage first have their finances entangled early, which can lead to arguments and stress — especially if they have diverging goals, lifestyles or financial philosophies.
“Differing financial goals and plans can strain both the relationship and joint property ownership,” Burbank said.
Both Burbank and Quicken Loans recommended drafting a legally binding cohabitation agreement — but an open and honest conversation should come first.
“In my teaching and professional work, I’ve underscored the importance of aligning financial paths and having transparent discussions about each party’s expectations and plans,” he said. “This alignment helps in mitigating financial disparities and supports the longevity of both the relationship and the investment in property.”
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This article originally appeared on GOBankingRates.com: I’m an Attorney: Why You Should Think Twice About Buying a Home With Someone Before You’re Married
