If you and your significant other hope to buy a home together, it's important to go in with your eyes open.
"Couples often go house shopping first before they even think about the mortgage," said Suzi Boyle of Castle & Cooke Mortgage. "But that's like getting married before your first date!"
"When a couple purchases a home together, lenders assess the couple’s ability to purchase jointly," explains Boyle. "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, there are some questions you can ask of each other, similar to those from a lender.
How much debt do you have?
If you've never talked about debt, brace for some surprises - potentially the bad kind.
Any credit card 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.
All this matters because of 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. The lender will add up all 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%.
What's your credit score?
Your credit score is a number that represents how well you've paid off past debts. As lenders 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.
You can get a free copy of your credit report at AnnualCreditReport.com. A credit score over 700 is ideal. The minimum credit score required for a mortgage among most lenders is around 660.
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 $500,000 home, a 20% down payment is $100,000, and you'll need to pay closing costs, which can be anywhere from 2% to 7% of the purchase price of the home.
Where is all this money going to come from? Your down payment can come from sources such as 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—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?
You should talk about who is going to be responsible for how much of the payment. Are you going to split it 50-50? How much can each of you afford? 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.
What happens if we break up?
We know you don't want to think about it. But in case of a split, you should have a plan in place.
One recommendation is putting together a contract specifying what would happen to the equity and who is responsible for the payment in case the relationship ends. Other considerations include, 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?
Nobody likes to talk about breaking up, but having these conversations before something happens will protect both of you.
