If you and your partner are thinking of buying a home together before marriage, be wary of these common mistakes.
Assuming Both will Pay
When you co-sign a home loan, you are not promising to personally pay 50% of the loan. You are promising to pay the full amount; so is your partner.
Of course, you and your partner can agree to split the payments however you see fit. Want one person to be solely responsible for the loan for the first 10 years? Go for it. Want both to send a monthly check to the bank, each for half of the monthly bill? Why not. You can arrange payment as you see fit.
However, be aware that if one of you does not pay, the bank can go after either of you. Even if you have a written agreement that says "Mike is responsible for paying 70% of the home loan and Amy is responsible for 30% of the home loan," if Mike defaults, the bank can foreclose, get a judgment against Amy, and garnish her wages, or worse. Meanwhile, Mike might never pay a dime.
Life is unpredictable. You or your partner might lose a job, get sick, or have to cover an unexpected expense, leaving the other to pay for the entire home loan. Or, in a more sinister world, one of you might refuse to pay just because.
Before co-signing a home loan, talk with your partner about finances, reach an agreement on how the loan will be paid and what will happen if one of you can't or won't pay, and decide whether this is a risk you can afford taking. Your partner's actions could devastate your credit score.
Assuming Equal Ownership
No matter how you title your house, in the end, your percentage ownership will depend on whether anyone challenges your ownership and how a Judge interprets intent. Say you and your partner buy a home, with each having 50% transferable interest. Here are some of the many different possible ownership outcomes.
If you and your partner stay in a relationship and sell the house, you will probably just split the profits in half, no questions asked.
If you and your partner peacefully break up, sell the house, you might share the profits in half, just to get the breakup over sooner and without problems.
If you and your partner have a nasty breakup, both refuse to move out of the house, and one of you goes to a Judge and asks for a partition, the Judge very likely will split ownership based on who paid how much for the house. This may be strictly loan payments; loan payments plus property taxes; or loan payments, property taxes, and miscellaneous home expenses such as electricity and gas; and so on. You might end up with 80% ownership, 50%, 10%, or no ownership.
If your partner passes away, leaves their interest in the home to a friend, that friend likes you, and you and the friend agree to sell the house, then probably you will split the profits in half.
If your partner passes away, leaves their interest in the home to a sibling who hates your guts, and that sibling become hell bent on destroying you, you might end up losing all ownership of the home if a Judge decides that, despite title, you and your partner never had the intent to co-own the house.
One way to avoid this uncertainty is to sign an agreement that clearly states who owns how much of the house, whether unequal payment will change percentage ownership, what types of payments (home loan, property tax, gas bill, etc.) will count as contribution towards the purchase of the home, and so on. The more you include, the more likely, if a problem arises, the Judge will divide the property per your original intent.
Assuming the Relationship will Last Forever
No one wants to think about the breakup when in love. That is why so many people forego a prenup when getting married only to discover years later that they should have signed one. Unlike marriage, where there are rules on dividing property, if you and your partner breakup, there is no clear guideline on how you should divide your property, debt, and the home.
What if, during a breakup, one of you stops paying the home loan? What if one of you trashes the house? What if one refuses to sell? What if one decides that they are the sole owner? What if one privately sells their interest, and the other is stuck living with a complete stranger? Etc. During a relationship, most people are reasonable. At a breakup, all courtesy tends to fly out the window, and you can never predict what someone will do when they feel betrayed or vindictive.
One option is to assume you won't breakup, and if that day comes, hire a lawyer and take a risk at court with no guarantee on how a Judge will rule. Don't forget, though, that at the same time, you will also need to be dealing with the bank, your ex, their angry family, creditors, and maybe even kids.
A better option is to assume you will break up eventually and to sign a dating contract that resolves as many of the foreseeable financial problems as possible. Some of the questions a dating contract can answer include, but are not limited to, the following:
At breakup, will both of you stay in the house?
If one moves out, will the partner that stays take over and pay the full loan until the house is sold?
If the remaining partner does take over the loan payments, will that partner's increased payments mean that they will have more equity in the home than the partner that leaves?
Will you put the house on the market right away?
Will you accept the first offer to speed up the process?
If at breakup, the market is bad for sellers, will you postpone selling until the market improves, and if so, who will get to live in the home in the meantime? Will you rent it?
How will you split profits? What about losses if the sale price does not cover the home loan and you are left with an outstanding balance?
What will you do if one of you refuses to abide by the agreement? Will you mediate, arbitrate, go to court? Who will pay for the attorney fees?
These are just a few questions that a dating contract can answer. It can also answer questions on what will happen to the jointly purchased furniture, dishes, pets; how you will divide other co-signed loans; and whether one of you will pay a settlement to the other to compensate for domestic labor during the relationship. The more your dating contract covers, the less you will have to fight about when you least want to see your partner. Yes, it may seem tedious and expensive today, but it will save you thousands of hours and dollars when the relationship ends.
If you are in a relationship and are worried about the consequences of joint property ownership, schedule a time to talk. We'd be happy to help! Let's make the world a better place. Let's date intentionally.