Mortgages for Unmarrieds: Part I
Getting a mortgage and buying a home offers some significant challenges for two unmarried people that traditional couples don't face. Some of those have to do with getting the loan itself; others have to do with protecting yourself in case the loan or the relationship goes sour.
While unmarried domestic arrangements are far more common today than they were a few decades ago, unmarried partners still account for only a small percentage of homebuyers, officially. Unmarried couples made up only 8 percent of all home purchases in 2010, according to the National Association of Realtors, compared to 58 percent for married couples.
Unmarrieds ranked well behind single women, who made up 20 percent of homebuyers, and single men, at 12 percent.
It's quite possible that some of those single women and men were in committed relationships but were simply buying a home and taking out a mortgage in their own name only. But it doesn't have to be that way, unless one partner has credit issues or excessive debt.
In fact, any two or more independent adults can join together to get a mortgage or buy a home. You don't even have to be a couple, gay or straight. Sometimes, two or more families may go in together to buy a large home they all can share, a situation that sometimes occurs among extended families or siblings may opt to buy a home together because it makes sense at their present stage of life. The rules are the same.
Qualifying for a mortgage as separate individuals
First, there's the challenge of qualifying for a mortgage. Most lenders have no problem with allowing two unmarried people to apply for a mortgage together. You might think they'd be concerned the loan could go unpaid if the couple splits up, but that risk is there for married couples as well.
When you apply for a mortgage together, you can combine your incomes so as to qualify for a larger mortgage than you could get if either of you applied separately. The problem arises if one person has weak credit, or simply a lower credit rating than the other.
Weaker credit score dominates
When two people apply for a mortgage, lenders will typically qualify it based on the weaker of the two credit ratings. So if one of you has a credit score of 790 but the other is at 670, the mortgage will be qualified based on the lower score. You may still get the loan, but you'll pay a significantly higher interest rate than if the high-credit partner applied as an individual.
In some cases, lenders will use an average of the two credit scores. This is more likely to happen if you're applying for a non-conforming mortgage (one not backed by Fannie Mae or Freddie Mac), such as a jumbo loan or a private-market mortgage where the lender plans to keep the loan on its own books, as many credit unions and small lenders do, rather than selling it on the securities market to investors.
There can also be a problem if one partner is carrying an unusually high debt load, such as accumulated credit card bills or student loans. Perhaps both of your car loans are in one partner's name because they were able to qualify for a family member or employee discount.
Applying in just one partner's name
In that event, it may be more advantageous to apply for the mortgage solely in the name of the partner with the lower debt load. That's particularly true if the new mortgage would push your combined debt-to-income ratio above 36 percent, at which point lenders tend to start increasing their down payment and credit requirements.
One of the biggest drawbacks of applying for a mortgage in just one partner's name is that person bears the entire liability for the loan. So if their partner leaves and takes their financial contribution with them, that person is stuck with making the entire mortgage payment each month. Or if one partner loses their job and the mortgage goes into foreclosure, the entire hit is on the credit score of the person holding the loan.
Another downside of applying for a mortgage in just one partner's name is that you can't take the tax deduction for mortgage interest unless your name is on the mortgage. So even if both partners are paying the mortgage, only one gets the deduction. On the other hand, that could be beneficial in some situations, as it could increase the total deductions the two partners are able to take if one is takes the entire mortgage interest deduction and the other is claims the standard deduction.
Even if you're applying for the mortgage in just one person's name, you can generally have the title to the home itself listed in both names. Some lenders may balk at approving the loan in such situations, however, in which cases you may need to find a different lender.
Aside from actually obtaining a mortgage and buying a home as an unmarried couple, there's a whole separate set of challenges related to how you'll set up ownership, obligations for mortgage payments, utilities and upkeep; as well as protecting yourself in the event of a breakup. We'll address those in part II of this article next week.