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If you’re considering buying a home before marriage, there are more things to plan than just the wedding. Your marital status can affect whether you purchase individually or as co-owners, and how you choose to hold title to the home. Read on to learn more about the pros and cons of single versus joint mortgage applications as well as the most common types of title ownership joint home buyers undertake.
- How Does Marriage Affect Your Mortgage?
- Property Rights for Multiple Buyers
- Tax and Legal Issues With Buying a House Before Marriage
How Does Marriage Affect Your Mortgage?
Applying for a mortgage as a single man, single woman or as a married couple has no bearing on your ability to qualify. In fact, marital status is a protected category under the Equal Credit Opportunity Act. 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."
When it comes to qualifying for a loan, it doesn’t matter if you’re applying as a married couple or as two unmarried individuals, because the loan terms and approval criteria are the same. The likelihood of being approved for the loan depends on income, credit and assets—not marital status. There are pros and cons to using just one person’s credit and income information versus a joint-application.
The Pros of a Single Application
- If your credit score is significantly higher than your partner’s, it will be the only one considered in the credit decision.
- If your credit history is free of derogatory information while your partner’s is not, yours will be the only information considered.
- If your debts and other obligations are significantly lower than your partner’s, only yours will be used to calculate your debt-to-income ratio.
The Cons of a Single Application
- Your partner's income cannot be considered part of your debt-to-income ratio and will not be used in the credit decision.
The Pros of a Joint Application
- If both credit scores are similar and meet the qualifying threshold, then applying jointly will not affect the credit decision.
- If both credit histories are clean, then applying jointly will not affect the credit decision.
- If your debt-to-income ratio is lower when using both of your income sources, this can be considered in the credit decision.
- If you’re using higher joint income, then it’s possible to be approved for a larger loan amount.
The Cons of a Joint Application
- The credit decision will be based on the lower of the two scores, potentially leading to higher costs and more difficulty qualifying.
Property Rights for Multiple Buyers
Home ownership is recorded through the deed, not the mortgage, so whether you acquire a property jointly or obtain a mortgage in just one person’s name, you can still choose how to divide ownership. Depending on your local laws, you can record title in the following ways:
Under sole ownership, you have complete control over the property and no one else can sell or take out loans against it. Also called ownership in severalty, this method of vesting is used by single individuals and married individuals whose spouse has signed a quitclaim deed removing their ownership interest in the property. The vesting information will read "sole and separate property" on the deed.
A will can designate inheritance, or the property can end up going through probate upon the death of the owner. One of the drawbacks is that in the unfortunate event that something diminishes your capacity, no one else can act on behalf of the property. In the event of your death, the property is required to go through probate to be transferred to heirs. This is a lengthy, expensive and public process.
Under joint tenancy, any two or more people can hold title to the property. Also called tenancy by the entireties, this method of vesting is used by co-owners who take title at the same time and own equal shares. This title grants the surviving co-owner ownership of the property in the event of their partner's death.
Joint tenancy is useful in avoiding the costs and delays of probate, but a joint tenant may also convey their interest (through sale or gift) to another party without consent of the co-owner, which allows for an easier transfer process. If the property is transferred through a will, it will be required to go through probate in order to be transferred to the heirs.
Tenancy in Common
Tenancy in common is the least restrictive title vesting, where each owner can sell or take out loans on their share of the property without the consent of the other owners. This method of vesting is used by co-owners taking title, particularly if they are not a married couple. Each owns a specific percentage of the property and it need not be equal. An advantage of this method is the ability of co-owners to designate their interest for inheritance rather than automatic transfer to the co-owner.
There is less likelihood that heirs could be unintentionally disinherited by the actions of a surviving owner, but less restriction can also mean 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.
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 following states are known to have community property laws:
- New Mexico
The property is conveyed to the surviving spouse without going through probate. However, there is an increased risk of unintended inheritance, and the property ownership becoming contested among multiple parties (with potentially differing interests). Creditors may also be able to lay claim to the home under community property laws if you pass away in debt, as your home becomes part of your estate under the community property laws of many states.
Vesting into a revocable living trust allows for the most control and flexibility of all the vesting options. This method of vesting involves the property being held in a revocable living trust until the trustor dies or is incapacitated and all trust assets being distributed to the trustees according to the terms of the trust. It has the added benefit of avoiding probate costs and delays.
Setting up the trust is less expensive and time consuming than dealing with the probate process. The trust process is also considered private, where probate proceedings are not. Most importantly, owners still have full control of the property and in the event that they become incapacitated, a successor trustee can act on behalf of all the beneficiaries. Revocable living trusts will require a greater upfront investment of time and attorney costs.
Tax and Legal Issues With Buying a Home Before Marriage
Married couples usually have a tax advantage over unmarried couples when it comes to home ownership. The easiest way to address most of these issues is to put everything in writing if you decide to purchase the property together. However, if you're already set on tying a knot, keep in mind that your home isn't the only thing about your finances that you'll need to address.
Mortgage Interest Deduction
Individuals or married couples filing separately may also gain additional tax benefits if their total deductions (including mortgage interest) exceed 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, while married couples filing taxes separately can claim up to $375,000 in mortgage interest deductions each.
This can be an issue if you're buying a property with your partner and intend to split the costs of the home evenly. If you were to deduct the mortgage interest on a property in a high-cost area as an unmarried couple, you would be required to file individual tax returns. The IRS only permits 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.
Standard vs Itemized Deduction
Based on changes to the tax law in early 2018, married couples now need to have over $24,000 in tax deductions to gain from itemizing on their joint return instead of taking the standard deduction. Individuals now need to have greater than $12,000 in tax deductions (and if they file as head of household, $18,000) in order to make itemizing their deductions worthwhile.
The majority of married couples don't have enough itemized deductions to reap the additional benefits over the standard deduction. If they did meet the threshold, it may be more beneficial for one person to claim the mortgage interest on their tax return if it raises their deductions over the standard deduction threshold individually; in this instance, the other person would file separately and take the standard deduction, as illustrated in our example below.
Example: You would be able to deduct more if one spouse itemizes $19,000 in deductions and the other takes the standard deduction at $12,000, for a combined total of $31,000 in deductions. This would provide you with a $7,000 benefit over filing jointly and taking the $24,000 standard deduction as a couple. Consult with your tax preparer before deciding whether to file jointly or separately.
Head of Household
Married Couples (Joint Filing)
|Max Capital Gains||$250,000||$250,000||$500,000|
By contrast, unmarried couples are not eligible for joint returns and would be unable to claim the $24,000 joint deduction in either case. The tables above show the standard deduction amounts and maximum capital gains exclusions for the 2018 tax year.
Capital Gains on Sale of Property
When selling a home, if the property has increased in value, as a single person you can only exclude $250,000 in capital gains from your income. Joint filing increases your ability to exclude gains up to $500,000 provided that you both meet the ownership criteria. Since the IRS only permits one entity to claim the capital gains deduction, only one homeowner in an unmarried couple would be able to claim the $250,000 capital gains deduction as a single filer, while the other homeowner would forgo the deduction. This also represents a $250,000 disadvantage relative 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 prior to your marriage and sold afterward, only one of you must meet the residency requirement.
Property Upkeep and Splitting the Costs
The costs of homeownership include the down payment, monthly mortgage payments, property taxes and insurance as well as maintenance and upkeep. It’s important to plan for and discuss all of the costs of owning a home so you can minimize unexpected expenses and avoid conflict over your finances. This is often just the tip of the iceberg, especially if you’re considering budgeting to remodel the home as well.
Determining how household expenses will be handled and if they will be shared is more complex if you aren’t married and intend to split these with your partner. It is necessary to have this discussion if either of you own property separately, or if you’re going to be purchasing prior to tying the knot. Open and honest communication about your finances can only help your relationship. You don’t have to agree on everything, of course, but knowing how you each view and approach financial decisions is important.
Consulting with a lawyer and having a formal agreement in place will further protect each of your interests, and is recommended. An escrow agent can explain all of your options when it comes to your title vesting options. It’s also a good idea to set up a joint account for paying expenses if you’re not planning on commingling the rest of your finances prior to walking down the aisle.