What to Consider Before you Cosign a Mortgage Loan with a Significant Other
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With people waiting longer to get married, and housing prices and mortgage interest rates on the rise, it’s become more common for unmarried couples to consider buying a house together and taking out a joint mortgage. The National Association of Realtors estimates that 15% of young homebuyers are unmarried couples, a trend that has held steady for the past several years. Out of all buyers, unmarried couples outnumber single men, 8% to 7%, though married couples still make up the majority of homeowners at 65%.
“It happens a lot these days,” said Doug Crouse, a mortgage loan officer with UMB Bank in Kansas City, Mo. “If you wait until you get married, interest rates might go up by the time you buy, and prices might go up, so it’s often beneficial to buy as soon as you can.”
But taking out a joint mortgage is a big financial commitment. And while it can in some cases help you buy your dream home, it also introduces a lot of risk.
Here are some key factors to consider and how to prepare before signing on the dotted line.
What is a joint mortgage?
While the terms are often confused, taking out a joint mortgage is different than having a cosigner.
“With a joint mortgage, or I would refer to it as having a co-borrower, you are equally liable and jointly an owner and occupant,” Crouse told LendingTree. “Cosigners are also equally liable but may or may not be an owner in title and they do not live in the property.”
Buying a house with a significant other is a common example of a joint mortgage. You are borrowing the money together in order to buy a house that you will live in together, and you will both help make the mortgage payments.
A typical cosigner situation, on the other hand, might be asking your parents to cosign on your mortgage so that their income and/or assets can help you qualify for a larger loan than you would on your own. You are the borrower, you are the only one living in the house, and you are typically the only one making payments. But if you ever default on the loan, the lender can hold your parents responsible.
The good news is that you don’t need to be married or in any other kind of official relationship in order to take out a joint mortgage.
“It’s pretty common now for people not to apply as husband and wife,” said Crouse. “It’s not treated any differently in the decision-making process.”
With that, let’s look at some of the reasons to consider taking out a joint mortgage with your significant other, as well as some reasons to be cautious.
Benefits of taking out a joint mortgage
While there are some substantial risks involved with taking out a joint mortgage with your significant other — which are discussed below — there are several reasons why it can be an attractive option, and in some cases, even a smart decision.
You can buy a more desirable house
When you apply for a mortgage, lenders evaluate your income and savings — among other factors — in order to determine how much you’re eligible to borrow. The higher your income and the more you have in savings, the more the lender will be willing to lend.
Applying for a joint mortgage allows you to combine two people’s income and savings on one application, potentially making you eligible for a larger loan and helping you buy a more desirable house.
“Having another person on the mortgage gives you flexibility with how much you can borrow,” said Kari Jean Glosser, CFP and partner at Abacus Wealth. “If both people are working and have good jobs, you’ll be able to qualify for more money”
In some areas, where home prices have risen significantly over the past several years, taking out a mortgage with someone else might be the only practical way to afford a home. In other cases, it may simply allow you to buy a bigger house that you can grow into or to buy in a more desirable neighborhood.
“It could be easier with two people to move into a better school district or move closer to day cares and things of that sort,” said Mike Caligiuri, CFP, enrolled agent and CEO of Caligiuri Financial.
This could be especially important if you and your significant other plan on starting a family together in the near future. Combining your resources to buy a longer term house now might be a better decision than settling for a smaller home with the knowledge that you’ll likely have to upgrade later down the line.
“The concept of buying a starter home and living there for a few years before you get your big home, that’s not always a great idea,” said Caligiuri. “You might suffer from a bad market and you could be stuck in your home until the market rebounds.”
The bottom line is that applying for a joint mortgage allows you to pool your resources and have more options available to you. If you’re looking for a long-term home, this could be the smartest way to buy it.
You could save money over the long term
If you expect housing prices and interest rates to continue rising, then buying as soon as possible could save you money, and in some cases, might be the most realistic way to afford a house you want.
“As it stands right now, you really can’t save money fast enough,” said Crouse. “If you wait until you get married, with prices going up 5%-10% per year, and interest rates potentially up to 5% or 6%, it could be tough.”
Of course, it’s impossible to predict how housing prices and interest rates will change in the coming years, and home values in particular are incredibly dependent on regional variables.
But if you’re in a hot housing market, can afford to buy the house you want now and you expect to be in that house together for the foreseeable future, buying now could save you money over the long term.
Drawbacks to taking out a joint mortgage
Despite those benefits, there are a number of reasons to be wary of taking out a joint mortgage with your significant other. There are some very real risks involved, each of which needs to be carefully considered before you move forward.
You are 100% liable for the loan, no matter what
Although you and your significant other are listed as co-borrowers on the mortgage, Crouse said that the lender can go after either of you for the entire loan balance. And this is critically important to understand for a couple of reasons.
First, if you and your significant other break up, you’re going to have to figure out what to do with the mortgage. According to Crouse, with a marriage there would typically be a divorce decree in which one person is awarded the house and takes responsibility for the mortgage. But without that, there’s no legal document stating who’s responsible for the loan, and from the lender’s perspective you are both still on the hook.
Second, if your significant other loses a job or otherwise runs into a situation in which he or she can’t continue making the mortgage payments, you will have to make those payments yourself or risk defaulting on the mortgage and potentially face foreclosure. This is a big risk if you were relying on two incomes to not just qualify for the mortgage, but to afford the payments.
If you do find yourself in one of those situations, you have a few options available to you, but they all come with some risk.
“The easiest way to come out unscathed is to sell the home, pay off the mortgage and split the profits,” said Glosser. “The hard thing is that one person always seems to be attached to the property more than the other, and the person who’s less attached just wants to get out.”
Caligiuri added that this could put you in the situation of being a distressed seller, especially if neither of you can afford the mortgage payments on your own.
“Basically you have to sell this house now and the truth is that housing prices don’t always go up,” Caligiuri said. “You may be in a position where you have to sell at a significant loss.”
If there is one person who can afford the mortgage and wants to keep the house, it’s important to transfer everything the right way.
“What happens pretty frequently is people sign a quitclaim deed and give up their ownership interest in the house, not realizing that it does not give up their indebtedness,” Crouse said. “It just relieves them of ownership. It does not relieve them of debt.”
According to Crouse, the better way to handle it is for the person who is keeping the home to refinance the mortgage so that it’s just in his or her name. Then the other person can walk away without having any more responsibility for the debt.
Mortgage terms are subject to the borrower with lower credit
You might think that someone with a poor credit history could benefit from his or her significant other’s positive credit history, but it actually works the other way around.
“Each borrower has three credit scores, and it’s the middle score of the borrower with the lowest credit that all of the terms are going to be based off of,” said Crouse. “The person with the higher credit score is going to get worse terms by borrowing with someone with a worse credit profile.”
If you have a better credit history than your significant other, this could put you between a rock and a hard place. On the one hand, you may not be able to qualify for a big enough mortgage without your partner’s income. On the other hand, his or her negative credit history could lead to a higher interest rate, and could potentially make it difficult to borrow at all.
A negative credit history could also suggest that your significant other may not be reliable when it comes time to make payments. And no matter how much you love him or her, that’s something that has to be considered.
“The first thing I would do if you’re considering a joint mortgage is check each other’s credit,” said Glosser. “A lot of times couples don’t even know that their significant other is coming into the relationship with lots of debt or a spotty payment history, and that’s something you really need to understand before you start commingling expenses and income and property.”
Taking out a mortgage typically involves paying a number of closing costs that add to the cost of loan. On the flip side, selling a house can also be an expensive process when you factor in realtor fees, the cost of preparing your home and seller’s closing costs.
One of the big risks of taking out a joint mortgage with a significant other is that if the relationship goes south and you end up wanting to sell the house within a few years, you’ll not only have paid those costs to get in but you’ll have to pay many of them again to get out. And even if one of you decides to stay, refinancing the mortgage to take the other person off the loan will have its own closing costs or, if you opt for a no-closing cost refinance, the trade-off is typically a higher interest rate.
“There are a lot of short-term expenses of moving into a home,” said Caligiuri. “The idea is that although you’re making these short-term expenditures to move in, as long as you’re there at least three to five years you can make up for it. If not, you might just be spending a lot of money.”
Other considerations before taking out a joint mortgage
Beyond the specific pros and cons of a joint mortgage, there are a few factors you should consider before making such a large financial commitment with your significant other.
“It’s probably good if you’ve already lived together before you move into a home,” said Caligiuri. “Things change when you move in with your significant other, and the likelihood of breaking up is smaller if you’ve already lived together.”
Caligiuri also warns that there are a number of costs to owning a home beyond the mortgage, including property taxes, insurance and, sometimes, homeowners association fees — expenses that you and your significant other will have to decide if and how to share.
“Buying a house is often idealized as the American dream, but the downsides are real,” he said. “Homes can often turn into a black hole for your wallet with constant repairs, landscaping costs, taxes and other expenses.”
Caligiuri suggests that renting may be a good alternative for couples who either haven’t lived together before or are wary of the risks that come with taking out a joint mortgage.
“Renting isn’t the worst thing in the world because you can always get out of it,” he said. “If you break up or you want to move out for any other reason, it’s not a big deal.”
Weigh titling options. Finally, if you have decided that buying a home together is the right move, be aware that you have several different options for how you title the home.
- Joint tenants have equal ownership, and if either owner dies then the property automatically passes to the other owner. However, either owner can also sell his or her share of the home, which would leave the other person with a new co-owner who is potentially not of his or her choosing.
- Tenants in common can split their ownership in unequal shares. Upon the death of either owner, his or her share passes according to the provisions laid out in a will rather than automatically passing to the other owner.
- One person could also take sole ownership of the home, though of course this would put one person at a significant disadvantage in the event of a breakup.
There is a lot to consider when titling your home, and it’s a good idea to speak to a real estate professional in order to fully understand the options available to you.
Should you take out a joint mortgage with your significant other?
Taking out a mortgage is a big commitment even for married couples. It’s a significant amount of debt, and at the end of the day, both borrowers are fully responsible for paying it back.
It’s not a decision that should be made lightly, but if you and your significant other are committed to each other and are comfortable sharing financial responsibility, it could be a good way to combine resources and buy a house you truly love.