Understand the risks of committing to real estate with a partner, friend, or business associate.
I received this question from Kate:
“My boyfriend and I are professionals in our early 30s and have been talking about buying a house together. Although we probably will get married in a few years, we don’t want to wait to buy because housing prices are rising in our area. What are the risks of buying property together before marriage?”
No matter if you’re thinking about buying real estate with a romantic partner, friend, or business associate, there are important financial, legal, and emotional issues to consider. In this 2-part series, I’ll give you advice to stay safe.
An increasing number of home buyers are teaming up to buy real estate. Maybe you’re like Kate, who’s toying with the idea of committing to a house before marriage. Or perhaps you’re thinking about making a real estate investment with a friend, relative, or co-worker.
There certainly are advantages to pooling funds and buying a home or investment property that you might not be able to afford on your own. However, buying real estate with someone else can easily damage your finances and your relationship, if you’re not careful.
Unmarried couples don’t have as many legal rights as married couples, so it’s very important to consider all the potential pitfalls of buying property with a boyfriend or girlfriend.
Related Content: Getting Married: How Does It Affect Your Finances?
How to Own Property With Someone Else
When you buy a home, you receive a document called a deed, which shows the names of the owners and how you legally own the property. This is one of the first decisions you’ll need to make. If you’re not married, you have 2 main ownership options:
Tenants in Common – is when each person owns a distinct share of the same property, which can be in any proportion, such as 50/50 or 75/25. When one tenant in common dies, shares go to his or her beneficiaries, not to the other owner(s). This is a common type of title for unmarried co-owners, especially if each contributes different amounts to the purchase. Each owner can sell or give away his or her interest in the property.
Joint Tenants with Right of Survivorship – is when each person typically has equal interest in the property and maintains the right of survivorship. That means when one owner dies, their interest automatically passes to the surviving owner(s). The deceased owner’s shares simply disappear and can’t be inherited by beneficiaries. This type of title is most common between spouses or family members, when everyone wants the surviving tenant to have full ownership.
Although married couples can own property as tenants in common or joint tenants, they have a better option:
Tenancy by the Entirety – allows spouses to own property together as a single legal entity. This protects each person because a creditor of one spouse can’t attach and sell the interest of the property that the other spouse owns. Only creditors of the couple can touch property owned as tenancy by the entirety. When one spouse dies their interest passes to the surviving spouse, just like with joint tenant ownership.
Related Content: How to Buy a Home in 10 Steps, Part 1
How to Finance Property With Someone Else
Once you’ve thought about how you’ll hold title to real estate with someone else, you’ll need to decide how to finance it. Do you each have equal amounts of money to contribute to the down payment? Do you each want to be on the hook for a mortgage?
You won’t be treated any differently when buying real estate with a partner or friend than with a spouse; however, today’s lending environment is tough. Each mortgage applicant will need to show ample income, job history, and credit scores in order to be approved.
If one person has low income or poor credit, you could leave them off the mortgage, but that could cause problems down the road. It’s crucial to remember that you’re not legally responsible for the debt unless your name is on the mortgage. Being named on the deed indicates ownership, but not financial responsibility for debt on the property.
Let’s say your unemployed partner expects to find work after you move into your new home, but can’t. If you don’t pay 100% of the mortgage, your credit will be destroyed and you’ll probably face foreclosure.
Related Content: How to Save Money to Buy a Home
How to Create a Property Ownership Agreement
In the excitement of buying a home, don’t forget that you’re making a huge investment. A mistake could jeopardize your entire financial future.
To avoid confusion or any future misunderstandings about your arrangement with a cobuyer, you should create a formal ownership agreement. Don’t assume that you’ll just talk through any future disagreements when the time comes—because your relationship could be very different then.
Drafting and signing a document that outlines every potential issue you can think of is the only wise way to proceed. In part 2 of this series, we’ll cover every major issue that an ownership agreement should include when you decide to buy a home with someone else.
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Couple Behind House photo from Shutterstock.