Get Married And Buy A House: The American Dream
When you buy a house, the process is different when you’re married. It impacts how much you can afford to spend, and possibly how much you pay for your home loan. In addition, there are legal and tax implications of that joint purchase for years to come.
Luckily, there are plenty of resources to help you buy a house, beginning with the overview and strategies below.
The Power of Two
Besides wanted to share this exciting milestone with your spouse, the real advantage of buying a house as a couple is the ability to combine your income.
This scenario assumes that both individuals work. Applying for a home loan together means that your dual incomes give you more buying power.
Of course, lenders will also look at your joint debt to figure out the debt-to-income ratio. So if one of you has overwhelming personal debt, it could hurt you.
Coupling Your Credit
Pooling your income and debt to figure out how much home you can afford is the easy part. Your credit scores may be a more difficult obstacle. Mortgage lenders base underwriting decisions and mortgage interest rates on the lowest representative credit score.
What’s a “representative” credit score? For reports that pull scores from all three major bureaus, it’s the middle score. For those that pull only two, it’s the lower of the two.
So if one spouse has FICOs of 820, 799 and 815, the representative score is 815. But if he or she is married to someone with scores of 560, 581 and 600, the 815 score goes out the window. Underwriters will use the 581 score to evaluate the file.
When One Spouse Has Bad Credit
If one of you has less-than-stellar credit, it can limit your mortgage options, or you’ll pay higher interest rates. In a scenario in which one partner has poor credit, a couple has three choices:
• Put off your home buying plans for a few months to try to improve the credit score
• Move forward and accept that rates will be higher
• Let the person with the better credit take out the loan. But, this also means that only that person’s income will count.
The best advice for married couples: Don’t wait until you’re house hunting to find out the truth about each other’s credit.
Reviewing your credit reports together (you can get a free one from each of the three credit bureaus via annualcreditreport.com), will let you know where you stand before you find the home of your dreams. If one or both of you has improvements to make, you’ll know ahead of time and can focus your efforts.
Different Loans, Different States, Different Rules
If you decide that it will be beneficial for one spouse to buy a house, certain government loan programs might still require paperwork from both of you.
If you live in one of the nine community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin), both partners’ debts count in the debt-to-income ratio even if there is only one mortgage applicant. This is because community property states make each partner liable for a portion of the other’s debts.
In the remaining states, the non-purchasing spouse may still have to submit to a credit check for an FHA loan, although rules dictate that his or her bad credit cannot cause denial of the FHA mortgage to the other borrower.
Because of rules like these, or if you aren’t sure which home buying method is best for you and your spouse, work with a mortgage expert who specializes in government loans.
You might think that once you’ve decided how to buy a house, and determined whose name to put on the mortgage (either together, or as one individual), that you’re all done. But the next big question that will come up at the home closing is how you wish to take title – and it’s complicated!
Here are some of the common ways you can choose to hold title to your home:
Sole and Separate
This is when a single person’s name is on the title, even if you own the property with other people. One reason why this might be a good move is if one person in the couple has a high-liability occupation, such as a doctor who could be subject to malpractice lawsuits. Not putting his or her name on the title can help protect the home.
Joint Tenants with Right of Survivorship
This is the most common way that married couples hold title because it’s the simplest choice. It means that if something were to happen to one party, that owner’s interest in the property will pass to the surviving spouse. This gets tricky if the couple has children from previous marriages, however, since they will lose out on that inheritance.
For complicated family trees, this could be the best solution, since each owner’s will determines who inherits their share. In the absence of a will, the property will go to the owner’s heirs.
Also worth noting: In community property states, the ownership will transfer to your surviving spouse, unless your will says otherwise.
Depending on which option you choose, there are other tax implications should you want to sell the home some day, or if you divorce. Talking through the possible scenarios with an expert (such as a real estate lawyer) is a good idea. You can make modifications later on as well, should your needs change.
There are so many things to think about when you finally decide to buy a house, including how your marital status will affect the sale. Working with a knowledgeable mortgage broker and identifying your financial strengths and weaknesses can help you make the best choice.
What Are Today’s Mortgage Rates?
Today’s mortgage rates for couples depend on their joint qualifications as buyers — credit rating, down payment and debt-to-income ratio, for instance. If you’re considering a home purchase, check with several mortgage lenders to see what’s available to you.