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How Buying a House Married vs Unmarried Can Affect Your Finances

The decision to buy a home has many benefits, both financial and emotional. For couples, buying a home before or after marriage is a personal decision. Both options have pros and cons, so it comes down to your finances and goals as a couple. And, if you’re thinking about purchasing a home before marriage, there are more things to plan than just the wedding. 

If you want to buy a home with a partner you’re not married to, it’s important to know your state’s laws and consult with legal and tax professionals before committing to a purchase. Your marital status can affect whether you purchase individually or as co-owners and how you choose to hold title to the home. 

In this blog, we’ll look at the pros and cons and what you need to know about how buying a house married vs. unmarried can affect your finances.

The Effect of Marriage on Your Mortgage

Applying for a mortgage either as an unmarried or a married couple has no impact on your ability to qualify. Under the Equal Credit Opportunity Act, marital status is a protected category. According to the Consumer Financial Protection Bureau, “financial institutions and other firms engaged in the extension of credit” are required to “make credit equally available to all creditworthy customers without regard to sex or marital status.”

It makes no difference to qualify for a mortgage if you apply as a married couple or as two unmarried individuals because the approval criteria and loan terms are identical. The prospect of being approved for the mortgage is determined by income, credit, and assets — not marital status. Of course, there are pros and cons to using just one person’s credit and income information versus a joint application. Let’s take a look at those. 

Pros of a Single Application

If your credit score exceeds your partner’s, it will be the only one considered in the credit decision. Also, if your credit history is free of blemishes while your partner’s is not, yours will be the only information considered.

Cons of a Single Application

The major downside of applying individually is that your partner’s income cannot be considered part of your debt-to-income ratio and will not be used in the credit decision.

Pros of a Joint Application

If a couple applies jointly and both credit scores are comparable and meet the qualifying level, then applying together will not affect the credit decision. Also, if both credit histories are clean, then applying jointly will not impact the credit decision. 

Two major pros of applying jointly are that if your debt-to-income ratio is lower when using both income sources, it can be counted in the credit decision. It’s also possible to be approved for a larger loan using joint income.

Cons of a Joint Application

The major negative of applying jointly is that the approval decision will be based on the lower of the two credit scores, which could lead to higher costs and more difficulty qualifying.

Property Rights for Multiple Buyers

Homeownership is recorded through the deed, not the mortgage, so whether you buy a house together or get a mortgage in just one person’s name, you can still decide how to divide ownership. The title can be recorded in the following ways:

Sole Ownership

Under sole ownership, you have complete control over the property, and no one else can sell or take out loans against it.

One of the downsides of sole ownership is that if something should diminish the owners’ capacity, no one else can act on behalf of the property. And when the owner dies, the property must go through probate to be transferred to heirs. This is a lengthy, expensive, and public process.

Joint Tenancy

In this scenario, two or more people can hold the property title. Also called tenancy by the entireties, this vesting method is used by co-owners who take title simultaneously and own equal shares. In the event of a partner’s death, property ownership is automatically granted to the surviving co-owner. Joint tenancy is useful in avoiding the costs and delays of probate. Still, a joint tenant may also convey their ownership to another party without the co-owners consent, which allows for an easier transfer process. 

Tenancy in Common

Tenancy in common is the least restrictive method of vesting title, with each owner able to sell or take out loans on their share of the property without the consent of the other owners. This structure is most often used by co-owners who aren’t married. Each person owns a defined proportion of the property, and it doesn’t have to be equal. 

One benefit of this method is that co-owners can assign their interest in inheritance rather than automatically transfer it to the co-owner. As a result, there is a lower possibility that the actions of a surviving owner could inadvertently disinherit an heir. At the same time, less restriction can also translate to less stability. For example, if an owner doesn’t want to sell the property, they can still be forced to sell by a partition action in court made by other owners.

Community Property

Spouses who acquire property in certain states may take title as community property where each spouse owns half of the property, and their interest can be designated for inheritance. The right of survivorship is similar to joint tenancy unless there is a will designating inheritance. 

The property is automatically transferred to the surviving spouse without going through probate. But there is an increased risk of unintended inheritance and property ownership becoming contested among multiple parties. Creditors may also be able to lay claim to the home under community property laws if you pass away in debt because your home becomes part of your estate.

Tax and Legal Issues With Buying a Home As An Unmarried Couple

Married couples usually have a tax advantage over unmarried couples regarding home ownership. The easiest way for an unmarried couple to deal with these issues is to put everything in writing when buying property together. 

Mortgage Interest Deduction

Individuals or married couples filing separately reap tax benefits if their total deductions surpass the standard deduction. Due to recent changes in the tax law, the mortgage interest deduction for singles and married couples filing jointly is limited to $750,000 in mortgage debt. In contrast, married couples filing taxes separately can claim up to $375,000 in mortgage interest deductions each.

This can be a problem if you’re buying a property with your partner and intend to split the home costs evenly. Unmarried couples have to file individual tax returns, and the IRS only allows one homeowner to claim the deduction on mortgage interest, so only one of you would be able to benefit from the deduction on the full $750,000; the other would not be able to deduct anything.

Capital Gains

If the house has increased in value, as a single person, you can only exclude $250,000 in capital gains from your income when selling the property. When filing jointly your ability to exclude gains raises to $500,000.  

As the IRS only permits one entity to take the capital gains deduction, only one homeowner in an unmarried couple can claim the $250,000 capital gains deduction. This signifies a $250,000 drawback compared to a joint filing.

Typically, one or both of you must have lived in the home for two of the last five years—if the home was purchased before your marriage and sold afterward, only one of you must meet the residency requirement.

Property Maintenance and Splitting the Costs

The costs of homeownership include the down payment, monthly mortgage payments, property taxes, insurance, maintenance, and upkeep. It’s essential to plan for and talk over all the costs of owning a home to reduce unforeseen expenses and avoid quarrels over your finances. 

Deciding how household expenses will be managed and if they will be shared is more complicated if you aren’t married and intend to split them with your partner. It is imperative to have this conversation if one of you owns property separately or if you’re purchasing before getting married. Open and honest communication about your finances can only solidify your relationship. Remember, you don’t have to agree on everything, but knowing how each of you sees and considers financial decisions is essential.

It’s a good idea to consult with an attorney and have a formal agreement to protect your interests. It also makes sense to set up a joint account for household expenses if you need more time to blend the rest of your finances before getting married.

In Conclusion

Buying a home is always a major decision. When deciding on buying a house married vs. unmarried as a couple it is imperative to know and consider all the advantages and disadvantages before moving forward. For more information, we recommend consulting with an attorney and your accountant.

And no matter how, as a couple, you decide to buy your home, we’re here to lend our expertise and help you.

Spectrum Real Estate Consultants Team is the top-producing team of Realtors at Keller Williams Realty Leading Edge, completing over 1000 successful transactions since 2015. Our mission is to provide our clients with world-class service while simplifying the transaction through experience, technology, and effective communication.

Our team members are licensed and serve their local communities throughout Rhode Island, Massachusetts, and Connecticut. Our knowledge and professional experience allow us to identify opportunities and prevent unnecessary setbacks, saving you time, money, and frustration. So, when you’re ready, let’s talk.

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