Home buyer beware: Leaving one partner off the mortgage could be devastating
When two people buy a home together, both don't necessarily have to be on the mortgage.
In fact, it can be beneficial in some cases to leave one partner off. But it still could come back to haunt you.
If one partner has poor credit or significant debt, including them on the loan application could mean a higher interest rate or even failure to qualify for a loan, says Amy Tierce, regional vice president of Fairway Independent Mortgage in Needham, Mass.
What if your wife has defaulted on her credit cards or your boyfriend has been found liable in a personal injury case?
"It makes sense for only one partner to be on the house loan when the other is or could be liable in a lawsuit," says Yvonne Ike, estate planning attorney and principal at The Ike Firm in New York. "If the person becomes insolvent, then the creditor or plaintiff will try to get their hands on the person’s assets, including the house."
While leaving one person off the loan in these examples make sense, it's still fraught with peril, particularly if you're not married.
Laws about property ownership and debt responsibility vary by state.
"In many cases, both can be on the deed even if only one is on the note. However, the one on the note is responsible," Tierce says.
Community property states divide assets equally between husbands and wives.
"Many states say that couples living together with proven improvements to the home from both parties can claim ownership," says Powell.
Unmarried partners and residents of non-community-property states might face greater problems if the couple splits up and only one partner is on the loan.
"If the couple is not married, the partner whose name is not on the loan will have limited rights as to the money she or he has invested in the property. It is highly advised that unmarried couples have their attorney draw up a cohabitation agreement before they jointly purchase property," Ike says.
If the partner who is not on the loan ceases to pull their weight, the person who is on the loan might have little recourse. If they can’t make the payment alone, their credit score will suffer and the house could eventually be foreclosed on.
This double-edged sword can also cut the other way. The partner who isn’t on the loan might make all of his payments to the other partner and still end up with nowhere to live.
"If the person responsible for payment of the note fails to pay, the property may be foreclosed upon and all parties with an interest in the property may be removed, subject to the completion of a foreclosure proceeding," says Alex Constantopes, an attorney with Wasserman & Constantopes in Astoria, N.Y.
"I would not recommend purchasing a home with a partner, one on the mortgage and one not, without some type of contractual agreement," says Tierce.