No-marriage mortgages between couples are red flag parades

by Broderick Perkins

(2/18/2013) - When spring is in the air, thoughts can turn to both true love and shopping for a dream home.

If e'er the twain shall meet, without ever actually tying the knot, that hoped-for cohabiting bliss could quickly become woefully undone.

Kissing and making up may not be enough to overcome the lingering legal and financial problems stemming from a first fight that breaks out over a home.

"If you believe your relationship is solid, and if you both have respectable credit histories, buying a home should not be difficult in today's lending environment," says Gina Pogol, a licensed loan expert at LendingTree.

"However, understand that unmarried, joint homebuyers are seldom granted automatic protection on the federal and state levels. As a precautionary measure, unmarried joint homebuyers should consider signing a cohabitation agreement and a property agreement as part of their partnership and joint homeownership," Pogol adds.

When love is lost

A deal between two unmarried lovers - or brothers, or any two people, for that matter - is effectively a co-signing deal. When they work, they offer an opportunity for homeownership. When they don't, they can bring tears.

If one partner has given less than tender loving care to his or her credit, the mortgage lender could quickly lose interest.

"Lenders use the representative credit score of the partner with the worst credit for mortgage qualifying purposes. If your credit report is blemished, it doesn't matter that your fiancÃ© perfectly manages her debt," said Megan Greuling, marketing and communications manager at Lending Tree.

"If only one of you takes on the mortgage obligation, don't think that you can just add the non-borrowing partner to the loan later. Lenders require you to refinance to do that," said Greuling.

Trials and tribulations

Greuling says take Katy and Jeff, a fictitious couple, please.

Katy has excellent credit. Jeff, on the other hand, can't get enough of shopping until he drops whole paychecks to fill is wardrobe.

Katy takes out the mortgage, comes up with the entire down payment and then adds spendthrift Jeff to the title as co-owner.

Jeff won't give up his shopping habit and Katy decides to bolt. However, Katy discovers, even though she has sole responsibility for the mortgage, deadbeat Jeff owns half of the house. She'll have to buy him out if she wants to keep the home.

True cost of love

"Couples will go house hunting thinking they'll live together forever, even when only one partner carries the whole financial responsibility. But what happens when the rose-colored glasses come off?" asks Nathan Nguyen, a real estate agent with Intero Real Estate Services in Cupertino, CA.

"A few years down the line, if there's a split, one person can lay claim to half the property without having spent a dime on it. This is why such issues should be discussed right at the beginning, and planned for accordingly," Nguyen adds.

Greuling offers another shacking-up scenario that can turn committed cooing into baneful booing.

Emily and her fiance David buy a condo together. They discover that they can get a much better mortgage rate by leaving David and his iffy credit off the mortgage application, but Emily adds him to the home's title after closing. However, David's unpaid taxes later cause liens to be placed on their condo. She can't sell or refinance the property until David pays his overdue taxes.

In a final example of a house of love gone bad, Steve's identity is stolen, and he's still trying to prove that most of the debts on his credit file aren't his. To buy the home he wants, he empties his savings and gives the down payment to his girlfriend, Shelly. Shelly takes out the mortgage.

They agree that he'll be added to the home's title once his credit problems are cleared. Now, however, Steve panics every time they have a serious disagreement, because he realizes that he has no rights to the home that he helped buy if they break up. Talk about the old ball and chain.

Unequal contributions toward the purchase; one person obligated to pay the mortgage and one partner with title to the property are red flags that could inflame one or both parties and burn the deal to the ground.

"Not many couples think of such things. These are eye-openers," said Nguyen.