Sharing a down payment and mortgage
In a perfect world, partners purchasing a home together would split the down payment 50-50, and each would cover half of the mortgage payments and household expenses.
But we don’t live in a perfect world.
Every couple has a unique financial dynamic, and often the bigger earner will take on the greater share of expenses. This may not be a problem when the relationship is all dandelions and butterflies. But if things go south, it can lead to problems.
For example, say Roger and Sarah wanted to buy a house together. Sarah recently received a sizable inheritance and was able to pay for her 50% of the house in cash. But Roger had limited savings and a questionable credit history, and needed to take out a mortgage to cover his share.
The problem is, Roger’s mortgage lender wouldn't approve him unless Sarah co-signed for the loan. If they ever break up and Roger can't (or won't) make his payments, Sarah will be held responsible for the mortgage.
So, splitting the mortgage and down payment as an unmarried couple can be complicated — and risky. Fortunately, there a couple of ways to minimize that risk.
Choose the best method to hold title
When you purchase property as a married couple, each partner is entitled to half of the property regardless of whose name is on the title. If one person dies, ownership automatically transfers to the surviving spouse. If you get divorced, ownership is divided and each spouse gets a share.
This isn’t the case when unmarried couples buy a house together.
Many couples assume that after living together for a certain amount of time, they will be protected by "common law marriage" rights.
In reality, only eight states have a common-law marriage. And even in those states, assets acquired are not automatically shared between partners. That means if you buy a house as an unmarried couple, both partners must hold title.
Otherwise, there will be only one legal owner. If your name is not on the title and you split up, you will not be considered a co-owner of the property. Legally, everything you contributed to the mortgage will be considered rent payments.
Here are your typical options for holding title as an unmarried couple:
Joint tenants: This allows you and your partner to hold title jointly and enjoy equal rights to the property. If one partner dies, ownership rights are automatically passed on to the surviving partner without the need for probate. The downside is if one partner takes out a loan for the property, both are held responsible for repayment (as was the case with Roger and Sarah). Also, in order to sell or transfer ownership of the property, both partners need to agree. This can get tricky after a breakup.
Tenants in common: In this arrangement, each partner has a separate title that indicates his or her share of the property. If one partner dies, ownership does not automatically pass on to the surviving partner. Instead, it can be transferred to select heirs via a will. Tenants in common makes the most sense for couples who contribute unequal amounts towards the property. It also is useful for those who want to pass on their legacy to children from prior relationships. Lastly, since you each have separate titles, your partner’s creditors cannot come after your share of the property for debts owed. This makes it a safer option if one partner has problems with debt.
Sole ownership: This method for holding title gives 100% of the ownership rights to one person. This could be used if one partner is footing the bill for everything.
Sign a cohabitation agreement
Choosing the appropriate title option can help protect each partner in the case of a breakup — or death. But to truly keep your assets safe, you’ll want to work with a lawyer to set up a cohabitation agreement, also known as a "living together agreement" or "nonmarital agreement."
A cohabitation agreement is a legal document that breaks down each member's financial stake in the property and other assets. It lays out:
- Who is responsible for paying debts.
- How ownership of the property is split.
- How assets will be transferred if one partner passes away.
- How bank accounts, pensions and other money will be handled.
- How other assets and belongings — including cars, furniture, jewelry and pets — are handled.
- How much each partner will contribute to the down payment, mortgage payments and other bills.
Most importantly, the agreement clearly lays out how assets will be divided in the case of a breakup.
What happens if you do break up?
If you and your partner decide to go your separate ways, you’ll need to divide up the house and other assets accumulated during your relationship.
Even if you end the relationship on the best of terms, things get complicated when big sums of money are on the line. Fortunately, your cohabitation agreement will help keep everything fair without the need for expensive court proceedings.
But what if you skipped the agreement? In that case, it comes back to the title.
If you hold title as joint tenants or tenants in common, you have two main options:
- Agree to sell the house and split the profits according to the ownership percentages outlined in the title.
- Have one partner buy out the other using the fair market value of the home.
But what if the title is held solely by your partner, you have no cohabitation agreement, and your partner refuses to give you your fair share? Unfortunately, you may be out of luck.
You can try to settle in court, but without a cohabitation agreement to use as evidence, you’ll fight an expensive uphill battle. That’s why it’s so important to set up an agreement from the start.
Build your support team
When you’re madly in love, signing a cohabitation agreement may seem unnecessary and uncomfortable. After all, who wants to make a plan for the day their relationship fails?
That said, nobody buys a house with their partner expecting to break up, either. Yet it happens all the time.
Instead of looking at buying a house and signing a cohabitation agreement from a relationship perspective, consider it a business transaction. After all, purchasing a home is one of the biggest investments you’ll ever make.
To make sure the transaction goes smoothly, you’ll need a strong support team — a real estate agent to help you find your dream home, and a lawyer to draft an agreement that protects it.
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