It’s something of a cliché to say that communication is the key to any successful relationship, and that’s certainly true if you’re buying a home together. Behind all the home buying journey’s excitement lies some difficult conversations that must be had with your partner, and, no, we’re not talking about what color the drapes should be. Questions of debt and how you might handle a hypothetical breakup, while difficult, need to be discussed if everything is to go smoothly. Get involved without a clear understanding with your partner of what you’re getting into can be a recipe for disaster.
So, here are some questions that should be answered before you jump in. Like everything in real estate, it always helps to be prepared for the worst.
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How much debt do you have?How much debt do you have?
This is the time to get all the facts out in the open about how much debt each of you is carrying. Too much debt could torpedo your chances of getting a mortgage or land you with a higher interest rate than you can handle. It’s one of the most crucial areas a mortgage underwriter will look at when determining if you qualify for a loan. Key to this will be your debt-to-income ratio (DTI), a combined total of all your monthly debt payments divided by your shared monthly income. Lenders like to see a DTI that’s within a certain range, usually no more than 36%.
You can work out your current DTI right now by adding up all your combined monthly payments (credit cards, student loans, car loans, personal debts, etc.) and dividing that by your gross monthly income (before tax). For example, if your monthly debts amount to $1,500 and your monthly income is $7,000, then your DTI would be 0.214 or about 21%. Well, in the clear, but remember that this is your DTI before you add a monthly mortgage payment on top of it. Taking this example further, if we were to add a $1,000 mortgage payment, that would bring your DTI to 0.357 or about 35%. Far closer to the 36% DTI threshold and a good indicator of how large a monthly mortgage payment you can handle.
How much house can we afford?How much house can we afford?
While your DTI will play a big part in determining your qualifications for a mortgage, it is up to you and your partner to decide how much you can spend on a home. Chances are, you’ve been dreaming about a home of your own for quite some time, but now it’s time to put those dreams against reality. Compromises will likely have to be made as you don’t want to find yourself in a situation where you’ve taken on more than you can handle and become house poor. This might mean having to give up on a long-held wish to live in a certain neighborhood or have the desired number of rooms you’ve always wanted.
Your down payment will figure a lot in these conversations. Ideally, you’ll want it to be no less than 20% of the home’s purchase price. Anything less than that will mean having to take on private mortgage insurance (PMI) until you can reach 20% equity. Fortunately, there are other options that you may be able to qualify for, such as an FHA or VA loan. These come with low credit scores and down payment requirements (as low as 0% for a VA loan). You may also be able to take advantage of one of the many first-time homebuyer programs.
Where do you want to live and for how long?Where do you want to live and for how long?
Nothing’s a safer buy than a home, so people say, but that only works if you keep it for long enough to see your investment grow beyond what you first paid for it. This is the “break-even” point, and most experts agree that it takes about 7-10 years to reach. Your partner needs to be on some page about what your long-term plans for the future are. Do you see yourselves starting a family in the next few years? Would a sudden job promotion or career change lead to an unexpected move? What are your plans for the home once you’ve reached the break-even point? All of this should be discussed thoroughly before you even dip your toes into the market. If there are big differences of opinion on this, then it might be better to put off buying a home until you’re more in agreement.
Take plenty of time to decide what your ideal neighborhood is. Remember, it’s almost always better to buy a less than ideal home in a good neighborhood rather than the other way around. You can change and update a home, but you can’t do much about a bad neighborhood. Focus your search on those neighborhoods that fit your needs and have a good price appreciation. Watch out for red flags and know how to evaluate each home and neighborhood you come across.
What will happen if we break up?What will happen if we break up?
Hypothetical breakup scenarios never make for a fun conversation, but it’s one you absolutely need to have when buying a home together. Ideally, it would be best if you both came to a formal agreement on how the property should be divided in the event of a separation. You have a few options here on how to go about this. One of the most common is joint tenancy. This is where both parties hold an equal interest in the property. A clear advantage to this type of agreement is that if one of you dies, that persons controlling stake in the property automatically transfers to the surviving partner. This is known as a “right of survivorship.”
Another option is a tenancy in common, which splits each party’s controlling stake into a distinct and separately transferable interest. This can be a better arrangement if one partner makes a larger contribution to the down payment or monthly mortgage payments. The catch is that either party can choose to sell their controlling interest at any time without the consent of the other owner.
Both partners should seek separate counsel from a qualified real estate attorney or tax professional, whatever agreement you come to. Make sure you have a clear understanding of all the legal and tax ramifications of shared property. Any decision to buy a home will be a big one, and even more so when you’re buying it with a partner. Take all the time you need to discuss it thoroughly with them in a frank manner. It may not be a comfortable talk, but it’s one you may be both thankful you had later down the line.