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Thursday, April 3, 2014

First time buyer – Should I buy with my boyfriend/girlfriend?

Question - My girlfriend and I are thinking about buying a house together. What should I know about that?
Let’s assume that this is a significant relationship, maybe even with plans to get married someday. At least that’s the plan for now. If you were already married this would be a no-brainer; however, couples who are
not married need to think this through and plan ahead for both the good and bad that could happen in the relationship. It sounds like a good plan to have a place all ready to move into as a married couple; however, there are things that you need to at least plan for and not all of them are pleasant. The first is how the two of you will hold title to the property before you get married.

When married couples buy property the deed is usually written with the definition of the ownership rights (also known as Tenancy) called Tenancy by the Entirety. This is a type of joint ownership with rights of survivorship that's recognized in some states and can only exist between a husband and wife. Either spouse can withdraw the funds from an account without the knowledge or permission of the other spouse. However, with real estate, in most states the property can't be sold or mortgaged without the consent of both spouses. When one spouse dies, ownership of the property automatically vests in the surviving spouse without the need for probate.

In Michigan it is possible for either a married man or woman to buy real estate without the permission of their husband or wife; however, a man cannot sell that property without his wife’s consent. Michigan has a concept called Dower Rights, which protects the interests of the wife by requiring that she agree to the sale of the family home or any other real estate that he may own or that they jointly own. That grew out of the unfortunate practice some time back of men selling off the home, unbeknownst to their spouse, and then abandoning the family.  No such protection is afforded the husband under Michigan law if the real estate is in the woman’s name and she decides to sell it. Go figure.

When an unmarried couple buys real estate the title is usually made out n one of two ways – with either Joint Tenancy with right of survivorship or Tenancy in Common.

Joint tenancy with right of survivorship - With this type of ownership, all of the owners hold an equal right to the property. In other words, any owner can withdraw the funds from an account without the knowledge or permission of the other owners. However, with jointly owned real estate, in most states the property can't be sold or mortgaged without the consent of all of the owners. When one joint owner dies, ownership of the property automatically vests in the surviving joint tenants without the need for probate. So if one of the two of you died, the other partner would get ownership of the entire property. There would be no way to pass on your piece of the ownership to an heir or other family member; however, many couples choose this method of ownership.

Tenancy in common - With this type of joint ownership, each individual "tenant in common" owns a specific percentage of the property and can withdraw, mortgage, or sell his or her own separate piece of the property. When a tenant in common dies, his or her share of the property passes to his or her own beneficiaries and not to the surviving tenants in common. This type of ownership does allow you to pass your ownership portion on to your heirs or to other family members. This is also a commonly used method of titling real estate for unmarried couples. In most cases, unless otherwise provided for, the ownership for a couple would be considered to be a 50-50 split.

There are drawbacks to this form of tenancy, too. Let’s say that you are living together and have a child together; then, something happens to your spouse-to-be. You could find yourself in the situation where the heirs of your partner decide to sell off the portion that they just inherited. All of a sudden, if you can’t afford to buy them out of that portion; you may have to move out. It doesn't matter that you believe that your partner would have wanted you to have the place for yourself and your child. The probability of facing something like that happening increases the longer that you live together unwed. It can be especially bad if you have a strained relationship with your partner’s family.

There is also Community property - This is a type of joint ownership that's recognized in some states and can only exist between a husband and wife. Each spouse's ownership rights in community property are set by specific state laws. Those same state laws may deal with common law marriages which can occur once a couple has lived together in an unwed state for a specific period of time. That varies by state.
So, let’s get back to what you should do. Most lawyers would probably advise you to have a pre-nuptial agreement in place that specifies how you want this issue dealt with, especially should anything occur that causes you to have to unwind the relationship and divide things up. This would also be especially important if you had children from a previous marriage. You would want to protect them and their interests, should anything happen to you.

If you held the property as joint tenancy with rights of survivorship and  you broke up and then passed away before the property was sold and the proceeds split or if you just passed away before the wedding; your children would get nothing or certainly have no claim to the property or proceeds of a sale.
If, on the other hand, you held the property as Tenants in Common, your children would inherit your half, if something happened to you. They would have a claim on the property and any proceeds from a sale. The same would be true of your immediate family, if you did not have children. You mom and dad might inherit your share.

Once you do get married the tenancy changes to reflect that state of affairs and you have tenancy by entirety.

I know that it doesn't sound very romantic to discuss things like tenancy, pre-nuptial agreements and one of you dying; but you are about to take a big step into the adult world with this partner, so you might as well get started by doing the right, adult thing at this point. This won’t be the last time that you have to deal with stuff together that isn't all lovey and pleasant. If you want to read more about this topic, in excruciating legal detail, here’s a link to a legal site.

Buying with a boy or girl friend can get a little complex from the mortgage standpoint, too; since both of you will be evaluated for the loan. It can get particularly difficult if one of the two of you is self -employed and does not have a steady income stream. That happens a lot these days with men being in business for themselves in lawn care or other services businesses or being employed part time in businesses that use 1099’s to pay them. You should be ready to share at least the last three years of your tax returns. Check with your lender about the process and follow his/her advice on that.


The best advice is probably to wait until you are married; however, failing that, then heed the advice that the referee gives the boxers in a match before the initial bell – protect yourselves at all times.

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