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When your clients say yes to mortgage, but no to marriage

by Melanie Kalmar

When your clients say yes to mortgage, but no to marriage

Nontraditional couples have been going in on big purchases together forever. But the trend of unmarried duos going in on a property purchase together is a rapidly growing trend. Much of this is driven by the fact that young people are putting off marriage, and cohabitation before getting hitched is much less frowned upon than it once was. But also, brokers, mortgage professionals and others in the real estate space tell us they’re seeing parents and adult children, friends, and other social groups get together to invest in homes.

“We’re seeing more and more unmarried couples purchasing homes in the Chicago market,” said Howard Ackerman, vice president of mortgage lending at Regions Mortgage, noting that agents and buyers who are prepared for the process shouldn’t have inordinate difficulties in the process of getting a loan. “The difference between traditional and non-traditional households need not be a pitfall.”

What does this mean for agents? It’s an opportunity to add value to the client experience by helping each individual owner protect their stake in the real estate investment from unforeseen circumstances — death, a breakup or a lawsuit. Agents and brokers can set their clients up for success by connecting them with reputable lenders, real estate attorneys and insurance agents before they begin the homebuying process.

Asking the tough questions

One point that Esther Phillips, senior vice president of Key Mortgage Services, is quick to make is that generally, lenders don’t treat borrowers who are unmarried any differently from borrowers who are married. “The challenges are on the legal side of it, as to what legally could happen if they decided that they don’t want the property anymore. Since they are not married, there are different legal ramifications,” she said.

One question that might come up, for example, occurs when the entire down payment comes from one individual. If the couple later decides to sell the property, how will they divide the proceeds?


Also in this issue

Mortgage sans marriage

Unwinding partnerships: When one party wants out of a mortgage

Tenancy, liability and ownership: The best legal structures for your clients


Ackerman noted that understanding and fully documenting the loan application process for each applicant in the transaction, in addition to determining how ownership and title will be held by all parties, is the key to a smooth transaction. “Clearly understanding and adhering to the privacy laws that govern mortgage lending activity is important when working with unmarried couples,” he said. “This may include completing separate loan applications for each borrower. It may also necessitate ordering separate credit reports and obtaining asset documentation from each of the borrowers, if their assets are not held in joint accounts.”

Situations like that are the reason why Neil Narut, senior underwriting counsel with Proper Title, feels it is important for lending, title and other real estate professionals to have a good working relationship with unmarried clients, fully understanding their situation and expectations well before meeting up at the closing table. That’s also why Narut said it’s up to agents to cover all the bases from the start.

Agents should be sure to ask their clients questions about their future plans, their credit histories and upcoming big purchases they may need to make. For example, Narut noted that, while it might not seem like anyone’s business, it’s not out of line to ask if your clients plan to get married in the near future, because there are issues and changes to the title they may want to consider later.

A typical scenario he sees is an unmarried couple buying a home prior to their upcoming wedding. “It’s important to consider what will happen after you get married,” he said.

“If you come in together as joint tenants or tenants in common, be advised after you get married, you will want to protect yourself.” In Illinois, married couples and couples joined by civil unions can hold title as “tenants by entirety,” which means if one spouse is sued, a judgment creditor cannot force the sale of the home because of their joint interests, Narut explained. He emphasized once unmarried homebuyers become married, they should have a real estate attorney do a quitclaim deed to put the property in their name as a married couple, therefore becoming tenants by entirety.

So much more than a credit score

Another important conversation point can also be a sensitive one: financial well-being. Whether homebuyers are married or not, the loan process requires a full underwrite for each borrower. Greg Moore, senior mortgage consultant for Blueleaf Lending, noted that everything is reviewed: income, credit and assets. The resulting debt-to-income ratio helps determine the size and terms of the loan.

It’s not just massive loans that can impact credit. Moore noted that while a small department store credit card or medical bill collection might not impact buyers’ ability to qualify for the loan, it could change the terms they were expecting. Even if couples have exchanged the results of a recent credit check, that doesn’t mean they have all the information that will be taken into account when their mortgage application is considered, Moore explained, noting the algorithm for a mortgage credit report is different from a personal credit report and that factors that impact a mortgage report may not damage a personal credit report.

Underwriters will want to know about all of the liabilities, debt and ownership in other properties that the borrowers might have. For example, one party might be a non-occupying co-owner of another property, appearing only on the title, but he or she may still have an obligation to pay taxes and insurance that could be used against them. “It’s important that both parties disclose all of that information to each other, to know that there’s not something that may affect income-debt ratios later in the process,” Moore said.

Just because one party has a poor credit score doesn’t mean they have to forgo ownership of the property. Moore noted that the individual with the higher credit score can be on the mortgage alone but both parties can still appear on the title. That way, the overall loan and private mortgage insurance premium, if it applies, would be available for the best possible terms, but both clients will still have ownership in the home.

Moore advises lenders to review the file as a whole with both borrowers and create a comparative analysis of what it might look like if the other person were not on the loan, to see which scenario best suits the borrowers.

Phillips agreed, noting that there are other options for couples who need the income of an individual with a poor credit score to obtain the loan. “A good loan officer should look at it in totality and figure out which way is going to give that particular borrower the best financing,” she said. Lenders may work with the couple to discuss ways of bringing up that score and potentially refinancing on better terms somewhere down the line.

For unmarried couples, debt and assets might not be as clearly disclosed as they would be between married couples. While Moore always advises borrowers against making big purchases, like furniture or cars, without checking with the lender first, he noted that having this discussion is even more important when couples don’t have joint accounts.

“Any debt assumed during the process could impact your ability to close on the loan,” he said. “If you are an unmarried couple, you have credit pulled early so both parties are aware of anything that could be on the credit profile of the other borrower that wasn’t disclosed to them.”

Lenders working their magic

Agents can prepare unmarried homebuyers for the process by introducing them early on to a reputable lender who can serve as a trusted advisor during their home search, said Ackerman. “It is advisable to obtain a preapproval from the lender, so the homebuyer and real estate professional have a comfort level from which to begin the homebuying process,” he said.

Almost any loan product that is available to a traditional household is available to a nontraditional household, though Ackerman noted one exception: home loans from the U.S. Department of Veterans Affairs. A nonveteran cannot be a co-borrower with a veteran on a VA loan unless they are married.

To help reduce the cost of buying a home, Moore recommends borrowers ask lenders about the availability of first-time homebuyer grants. But he also cautioned that many of these affordability tools are based on income limits on either the household or one borrower, so whether or not a couple is considered a household or not could impact what they qualify for.

The best way to structure title

Narut meets with clients before the homebuying process begins to discuss expectations and the different ways they can hold title as an unmarried couple. Before he gets started, he asks them a direct question: What happens if one of you dies? More often than not, the answer will reveal each person’s expectations and explain what they bring to the table.

Such conversations may also inform the attorney that each person needs to obtain either individual counsel, because of a potential conflict of interest, or a conflict waiver. “An attorney may not be willing to advise both of them if they have different interests and different expectations,” Narut said. “It’s important to discuss all of this upfront.”

There are two common ways for unmarried couples to hold title: joint tenancy and tenancy in common. In joint tenancy, if one partner dies, the property automatically passes to the other person without going through the court system. With tenancy in common, if one person dies, their interest in the property remains part of their estate. If they have children, the kids then become the primary interest holders. If they don’t have children, it goes down the line to parents, then siblings. All the while, the surviving tenant in common maintains their interest in the property.

Of course, every situation is different, but Narut shared some rule-of-thumb considerations that can help agents and clients quickly understand what might be best for their scenario. “If the expectation of each person is that the other person should get the property, hold title as joint tenants,” Narut said. “If the expectation of each nonmarried person is that family should hold some of the interest, then hold title as tenants in common.”

The clear downside to tenancy in common is the surviving nonmarried person is going to have to deal with the late borrower’s interest and any relatives who may have claim to it, Narut said. He once represented a Filipino man who died suddenly without a will. The man owned property as tenancy in common with his deceased mother, who also had no will. “After all was said and done, two years later, the sale of the real estate involved division of various percentages to 19 different family members,” Narut said.

No matter how the deal is structured, it’s important to avoid making assumptions, according to Ackerman. “Each situation is unique,” he said of supporting unmarried couples buying homes. “It must be handled individually, with a focus on assisting the homebuyers into sustainable homeownership.”

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