Factors to consider when buying a house before marriage
Credit scores and interest rates
For married couples, both your credit scores will be considered on a loan application. When you're unmarried and applying for a mortgage, you have a choice: apply for the loan together, or just one of you can apply. If you have equivalent credit scores, being married or unmarried won't affect the interest rate you may get. But suppose your significant other has a significantly higher credit score than you, and you're unmarried. In that case, you may get the best interest rate if your partner applies for the loan individually.
Another major factor in mortgage lending involves your debt-to-income ratio – the amount of money you must pay on your debts every month, divided by your gross monthly income. A lower ratio is better in a lender's eyes because that makes them more confident you'll be able to pay back the mortgage loan. The debt-to-income ratio not only determines whether you'll qualify for a loan but also the total possible amount of the loan.
Consider which option gives you the lowest debt-to-income ratio – applying together, or having one of you apply for the loan. Also, understand which option allows you to buy a home you can afford – using one person's income for the application, or both? In addition to the ratio, the lender looks at the amount of income you have left over each month, some of which will go into paying the loan. That amount of available cash helps determine the amount of your loan approval.
Taxes and mortgage interest deductions
This is a situation for you and your significant other to consult with a tax advisor, but unmarried couples can't file joint tax returns. That means only one of you can deduct the mortgage interest from your taxes if you’re unmarried.
When unmarried couples buy a house, who owns it?
When it comes to buying a house before marriage, legal implications like ownership need to be addressed. There's a difference between the mortgage, which is the loan for the house, and the deed, which is the official legal document that says who owns the home. It's okay by law if one member of the couple is listed on the mortgage but not on the deed, or vice versa. That said, there are a few options to consider when it comes to ownership. However, not all options are available or work the same in every state.
- Sole ownership: Only one of you owns the home and is listed on the deed.
- Joint tenancy: You equally own the home, and you're both on the deed. But if one of you dies and you're not married, the property must go through the probate process rather than automatically transferring to the survivor. (If you have a revocable living trust, you may be able to avoid the probate process.)
- Joint tenancy with rights of survivorship: This is similar to regular joint tenancy, except that if one of you dies, the survivor inherits the other’s share of the property without going through probate.
- Tenancy in common: You're both on the deed, but you don't have to split the home's value 50/50 if you don't want to. And like joint tenancy, if one of you dies and you're not married, the property goes through probate.
You should consult together with professionals such as financial advisers, estate planners, and tax consultants to determine which option to pursue in your specific situation.