When clients say yes to a mortgage without an “I do”

by Melanie Kalmar

Today more than ever, as millennials are delaying marriage and homeownership remains the American dream, agents are guiding non-traditional buyers through the transaction process. Whether it’s unmarried couples, friends or relatives investing in a property together, agents can add value by making each party aware of the details that can make a big difference going into a transaction. Of course, that is only part of it. Before clients reach the closing table, they should have an exit strategy that will hold up in a court of law and cover all the bases, from the handling of common, unforeseen circumstances to a simple change of heart. With the proper planning, agents can help clients avoid trouble and feel good about saying yes to a mortgage without an “I do.”
Unanimously, experts in lending and real estate law suggest homebuyers meet with them before embarking on their property searches to learn how to get the best terms on a loan, the smartest way to hold title and the many details to address in writing to protect their investment should the relationship fall apart.

Money + emotions = a fiery combination

“Whenever parties who aren’t married buy properties together — family, best friends or a couple — they need to proceed with caution, because money and emotions do not mix well,” said Frances McKinney, a real estate attorney with Cook & James. “If they don’t address the issues correctly at the beginning, it’s a recipe for disaster.”
McKinney views buying a house together in the same way she does investing in a business, and like all good business owners, co-buyers need to begin with a plan. “Think about everything that could happen, put it down on paper and come to a consensus on all matters,” she said. “You need to address all the issues up front so there are no issues when you sell the property.”
Jason Lowey, a loan specialist at loanDepot, advises his clients to do the same. “Married couples have more protections than unmarried couples,” he said. “There’s a divorce proceeding with marriage; assets are divided by law. With unmarried couples, it can get dirtier.”
To avoid a mess, McKinney starts by asking clients questions that revolve around money, such as: Who will supply the down payment? Will it be split 50/50 or will one buyer provide it and the other party pay rent? Consider what happens when the property is sold. Is the person paying rent going to expect part of the equity? Who is going to pay for utilities and other expenses like cable? Will it be one individual or split evenly?
The way they manage their money matters, too. While married couples often comingle their bank accounts, Jay Zulauf, a sales manager at loanDepot, sees unmarried couples with separate bank accounts all the time. He strongly recommends they establish a joint account with an automatic draft. “If one person forgets to make payment on the mortgage, a late payment will effect both of them,” Zulauf said. “With a joint account that has automatic withdrawal, you don’t have to worry about that.”
McKinney delves even deeper by asking clients to consider who is the greater decision maker, since disagreements on small details like paint colors could cause a problem. Other points she gives them to ponder include: What will you do if both of you are on the loan and one of you loses your job and cannot make the mortgage payment? If you have a roommate, what happens if one of you gets married? Does one of you stay and the other person move out? If so, how do you pay them their interest in the home? Also, figure out how a buyout happens if you don’t have any savings. Another potential firestorm McKinney asks clients to think about is what happens if your co-tenant has bad credit? It needs to be addressed because their liens will affect title to the property when it’s time to sell, she said. “If you have to sell at a loss, those liens have to be paid, and you’ll have to pay them if your roommate has no money or no credit.” However, she does have a solution: establishing the property as a corporation could help protect co-borrowers from liens, if a lien is personally filed against one of them.

Getting past borderline bad credit scores

Married borrowers have the same issues as unmarried borrowers when they apply for a loan together, according to Jorge Valencia, vice president and mortgage production manager at Regions Bank in Atlanta. Each individual must have good, established credit, solid incomes and proven employment —two years in the same job or the same industry. “If one borrower has bad credit, you cannot use their income to secure the loan, which reduces the amount of home you can buy,” Valencia said. “If one individual has a 672-credit score, there might be things they can do in terms of paying off debt or clearing up a dispute to get them to the 680 score they need.”
At loanDepot, clients with borderline credit scores are offered a “credit simulator,” which allows them to see what accounts, if paid down, will result in a better interest rate. “It rescores a borrower’s credit based on a debt they paid down to show what account is worth paying down and the projected impact it will have on the borrower’s credit score,” Zulauf said. “For example, if they have a 695-credit score but they can get up to 705 by paying down a credit card and it would result in a better interest rate, say ¼ percent, that is a huge savings over 30 years.”
To avoid surprises, Zulauf highly suggests clients go to CreditKarma.com to pull up their credit reports, to see what they need to work on to improve their scores, in order to get the best terms on a loan. “If they are so far apart in credit scores, where it does impact the interest rate negatively, we see what we can qualify the borrower with the higher credit score for, maybe by themselves or with a co-signer, before applying for a mortgage,” Zulauf said. While the party with poor credit may not be on the loan, they can still maintain ownership in the property by appearing on the title. The co-signer can also assist with the down payment. However, Valencia said there is a downside. He has seen adult children forget to make payments on loans and destroy their parent’s credit.

Options for millennials carrying student loan debt

Zulauf and Lowey both estimate that 75 percent of homebuyers right now are millennials, and many are shopping for a mortgage before starting their home search. In eight out of 10 credit reports, millennials show up with student loan debt. In fact, a majority of them are living with their parents to pay down the debt and save money for a home, Zulauf explained. Most mortgage loan programs require certain debt-to-income ratios and a 1 percent payment of student loans. “If they have $10,000 in student loans, you calculate a $100 a month liability, even if the student loans are deferred,” Zulauf said, noting that the loans will eventually come due. “You have to calculate that 1 percent payment against them, to make sure they can still carry that debt and the house payment.” He said if buyers don’t have enough money for a down payment, there are programs that allow gift funds from parents, but those programs also have specific guidelines. For instance, loanDepot has a conventional 3 percent down program for first-time homebuyers that helps with out-of-pocket expenses. In addition, FHA loans are an option for buyers who have a higher debt-to-income ratio, because the guidelines are a little looser. “The FHA loan will go to a 55 percent back-end ratio whereas conventional loans only go to 50 percent,” Zulauf explained. In other words, their total debt cannot exceed 55 percent or 50 percent of their income, respectively.
Regions Bank’s “Affordable 100” loan product offers homebuyers with low to moderate incomes and a FICO score of 680, who don’t have a 20 percent down payment, up to 100 percent financing and does not require mortgage insurance, Valencia said. Regions also has a program for emerging professionals, specifically doctors and lawyers who have been in the field for seven years or less. “They have a lower income today, but they are going to be growing their income,” he said. “The Emerging Professionals Loan also requires a 680 credit score and provides 97 percent financing; buyers provide a 3 percent down payment and fund their closing costs. Although co-borrowers have to be married to qualify for a VA loan, Valencia said sometimes veterans choose conventional loans because they are easier to navigate.

Best way to structure title

McKinney advises unmarried couples to hold title as tenants in common. That way, if an individual owner dies, their half of the interest goes to their heirs. A potential pitfall is, if you don’t get along with their family, you will have issues, McKinney said. To avoid problems, she said it’s important to put in writing your answers to the following questions: If one person dies, how will you buy out their interest? Will you sell the property in order to pay them off? In a situation where the co-buyers are flipping houses, she suggests incorporating the property, like a business, and putting answers to questions like those in an operating agreement.
Even though a real estate agent is not an attorney, it is their job is to counsel the client, McKinney said. “Tell your clients to think about these things and seek legal assistance to put an agreement in writing that will hold up in court, if need be,” she said. “Because when money and emotions are involved, anything can happen.”