Love may be blind, but if you and your significant other hope to buy a home together someday, it's important to go in with your eyes open. That can mean you'll need to pop some questions about money—right now.
"Couples often go house shopping first before they even think about the mortgage," said Chris Lewis of Angel Oak Home Loans. "But that's like getting married before your first date!"
Talking about finances with your partner can be uncomfortable, but let's face it, while you may love her quirky sense of humor or his sunny smile, a lender is looking only at the cold, hard numbers. And even if your finances are in order, if your partner's aren't, it could jeopardize your home-buying dreams.
"When a couple purchases a home together, lenders will assess the couple’s ability to purchase jointly," explains Lewis. "One person’s credit or income could affect the couple's ability to qualify for a mortgage at all."
So before you start hitting open houses, make sure to ask these questions to help you size up the person you love like a lender would.
How much debt do you have?
If you two are serious, odds are you've talked about each other's incomes, but if you've never talked about debt, brace for some surprises—the bad kind.
"A lot of young people have serious student loan debt," says Lewis. According to Pew Research, 37% of people under 30 still owe on their educations, to the median tune of $25,000 for a bachelor's and $45,000 for a postgraduate degree.
You should also both come clean about your credit card debt. It's going to come out anyway: Any debt you're carrying will show up once you undergo the pre-approval process for a mortgage: car loans, personal loans, and even child support obligations (that's a whole other kind of surprise).
All this matters because of a thing called your debt-to-income ratio—that's a number your lender will look at to decide if you can afford to pay back a loan. To get it, the lender will add up all of your monthly debts and divide them by your combined monthly income. To qualify for a mortgage, that number cannot be over 43%, according to the Consumer Financial Protection Bureau, but ideally should be under 36%.
For example, if your joint take-home income is $8,000 a month and you pay $1,000 a month toward debts, that would mean your debt-to-income ratio is 12.5%. Add in a mortgage, and that number changes. In this scenario, a monthly mortgage payment of $1,880 would boost this debt-to-income ratio up to the recommended max of 36%.
If you're not sure, punch your numbers into an online home affordability calculator to get a ballpark idea of how much home you can afford.
What's your credit score?
Your credit score is a number that represents how well you've paid off past debts. And it's really important to lenders because, as they see it, that number shows how likely it is that you'll make your mortgage payments in the future. A low credit score could disqualify you from getting a loan, or it could mean you won't get the best rates. Both you and your partner will have your own credit score; even for married couples, they're not combined.
So how do you check your score? You can get a free copy of your credit report at AnnualCreditReport.com, and pay a small fee for your actual score. As for what number passes muster, a credit score over 700 is ideal. The minimum credit score required for a mortgage among most lenders is around 660.
The good news is that low scores can be fixed: Here are some ways to raise your credit score.
How much money do you have for a down payment?
Ideally, the two of you will be able to put 20% down on a property. That's a big chunk of change: On a $300,000 home, a 20% down payment is $60,000. And don't forget you'll need to pay closing costs, which can be anywhere from 2% to 7% of the purchase price of the home.
So where is all this money going to come from? Your down payment can come from savings, a gift from a family member, or part of a retirement account that you can cash in. (The latter is not ideal and can have tax implications.)
Another option is, you can put down less—some mortgages will accept as little as 3% down—but then you'll be required to pay an extra monthly fee called PMI, or private mortgage insurance.
Who owns (and is paying for) what?
"Prior to signing paperwork, you should talk about who is going to be responsible for how much of the payment," says Lewis. "Are you going to split it 50-50? How much can each of you afford?" Talk about what is going to be comfortable for each of you going forward.
You should also talk about whether both of your names will be on the title, which is the legal document proving you own the property. If you're both contributing to payments, "you absolutely want both people on the title," says Lewis. Otherwise, depending on your marriage status and what state you live in, one of you may not legally co-own the home.
What happens if we break up?
Yeah, we know you don't want to think about it. But in case of a split, you should have a plan in place.
Lewis recommends putting together a contract specifying what would happen to the equity and who is responsible for the payment in case the relationship ends. If one person contributed more to the down payment or pays more of the monthly mortgage payment, will that person retain a bigger share of the equity, or will you split things equally? If you break up, will the house be sold and the proceeds split, or could one partner buy out the other?
Nobody likes to talk about breaking up, but having these conversations before something happens will protect both of you in case things don't work out.
Joe Barbee – ABR,MRP
Barbee Dream Homes Real Estate Group
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