Purchasing a Home Together When One of Your Has Bad CreditIf you want to purchase a home by yourself, and you have bad credit, it is not impossible but generally you will have to pay more money for it. This means that you will have to put down a sizeable down payment and pay a higher interest rate. If you are purchasing a home with your significant other, who has better credit than you, then there are other considerations you should make.
Two of You Want to Purchase a Home, One of You has Bad Credit
If you want to purchase a home with your significant other, and only one of you has good credit, then there are a number of things you should consider in structuring the purchase.
Should You Have One or Both of You on the Mortgage and Deed?If the person with bad credit is at risk for defaulting on any of their financial obligations, then it is a bad idea to have that person listed on the deed. It is also a bad idea to have someone on the deed and not the mortgage.
If you and your bad-credit significant other can only obtain financing by both co-signing a mortgage loan, then the discussion ends there and you should co-sign the purchase.
If one of you has good enough credit to obtain financing on their own, then there are a few considerations as to the merits of having the bad-credit partner co-sign on the loan and be on the deed.
Generally, it is a bad idea to have someone who has a high liability risk or a high risk of default on the deed to property. It is always a bad idea to have someone on the deed who is not also liable on the mortgage. You want to protect the house, and creditors can attach a lien on real property for unpaid debt obligations and subsequently foreclose on the property to collect the amount owed.
If only one person in the relationship is on the mortgage and deed to the house, then essentially the other person will be just paying the rent. If the person with bad credit is OK with just paying rent, then that can be the end of it. However, there are a few things to think about in order to determine if this is truly fair to both parties.
Are You Creating a Landlord-Tenant Relationship?
If one person to the relationship does not have the credit to obtain mortgage financing, and in turn is not listed on the deed, and they move into the house, then by law a tenancy will be created. Therefore, the person in the relationship who obtained the mortgage financing and is listed on the deed would technically have the duties and obligations of a landlord. This brings on an entirely new set of issues for the relationship, namely, what are the duties and obligations of a landlord and should you make a lease agreement? These questions are only applicable to unmarried couples because married couples have an entirely different set of legal obligations to each other and a lease agreement would be nullified as between married persons.
For unmarried couples, you should ask yourselves the following questions in order to determine how you should proceed in the home buying process:
- Will the person not on the deed contribute an amount equal to the person listed on the deed to mortgage payments?
- Will the person not listed on the deed contribute to the payment of property taxes?
- Will the person not listed on the deed contribute monetarily to the cost of home improvements?
- Will the person not on the deed contribute to the purchase of major appliances (such as a stove, refrigerator, and washer/dryer)?
- Will the person not on the deed contribute, by their labor, to home improvements? (For example, installation of a deck, finishing the basement).
If you only answered yes to #1 and #2, then you may as well treat the party not on the deed as a tenant and consider their payments to be rent payments. Although it may not be the most fun conversation to have about your relationship, you may want to consider creating (and both of you signing) a lease agreement.
Even if you do not sign a lease agreement, an implied in law lease agreement will be created automatically and the person listed on the deed will be held to the duties of the landlord and the person not on the deed will be held to the duties of a tenant. However, actually creating a lease agreement will force both parties to the relationship to actually be honest each other about each person's rights and obligations with the home. This will avoid any potential confusion and will help in case of any difficulties later on with the relationship. A lease agreement can also be drafted by an attorney to provide for specific things that may be beneficial for you and your partner to get in writing with respect to the house. For instance, you should be aware that only the person/s who are listed on the deed may take a tax deduction for the amount of mortgage interest paid out over the year. This can amount to a large tax refund for one party depending on the circumstances. A specifically drafted lease agreement made just for you and your partner could provide for some sort of trade off because only one of you will be able to receive the tax benefit.
If you answered yes to any of questions #3 - 5, then you should strongly consider a Home Ownership Agreement between yourself and your partner. A Home Ownership Agreement should be considered when both parties to the relationship will be making significant contributions to the home, but only the party listed on the deed will be the legal owner of the property and any equity that accrues to it.
What do you do if one party is making significant improvements to the property but is not listed on the deed?
You can make a contract that provides a way for that person to receive compensation in the event the relationship goes sour. If only one party is listed on the deed, but both parties are splitting the home's expenses equally, then not only is that party missing out on valuable tax deductions, but they are also missing out on any way to get reimbursed for valuable home improvement projects in the event of a breakup. This kind of agreement needs to be reached before you purchase a home.
When purchasing a home together as an unmarried couple it is important to plan for the best but prepare for the worst. There are an infinite number of ways that a Home Ownership Agreement could be drawn up, and truly it should be catered specifically toward you and your partner.
One person may be paying thousands of dollars towards remodeling projects, necessary home repairs, and other things that normally just the landlord would be obligated to do. It would only be fair for this person to have a way to get their money back if they move out of the house in the event of a breakup. This could be provided for in a number of different ways.
You could keep a tally of monetary contributions and labor hours spent on home improvement projects. Then you could provide in a contract that in the event of a breakup, this total is treated as a loan to the person listed on the deed. Repayment of the loan could be handled in a number of different ways as well. This will be a touchy subject because in the event of a breakup, not only will one person have to front all of the costs of home ownership by themselves, but they will have a loan repayment in addition to that. Thus, you could provide that whatever the balance of contributions is, it will be paid back in equal monthly payments over the course of 5 years. But as a practical matter, people do not want to be legally obligated to deal with their ex for 5 years.
An alternative would exist if there was equity in the house, then the party on the deed could take out a second mortgage and pay back the amount of contributions. Or, if market forces increased the value of the property, then the Home Ownership Agreement could provide that the home be appraised within a set amount of time after the breakup, the equity determined based off of the appraisal value and split in half, payable through the attainment of a second mortgage. An additional option would be that one party would get to keep certain collateral upon moving out that would cover the amount of contributions. The possibilities are expansive, but really what you need is a solution that would actually be workable in the event of a breakup.
If you are looking to buy a house with your significant other who has bad credit, you should consider your options. At the very least the two of you should have a practical discussion about what will happen if you break up. In order to protect everybody if the worst case scenario does happen, you should consult with a lawyer and draft a Home Ownership Agreement that lays out each party's rights and responsibilities with respect to the house if you do break up.
Contact an Attorney to Purchase a Home as an Unmarried Couple