Reports from early 2020 show that the share of US homeowners who are single hit a record 38.4%. Simply put, singles are purchasing houses before prices increase too much and they miss out on great mortgage loan rates.
However, if you’re in a relationship, you might find that now is also the time to purchase a home with your partner. In that case, you’ll probably be wondering if co-owning a home is right for you. Or, you might be wondering if you can afford your dream home with your and your partner’s income. Those are all valid questions, and we’ll answer those for you!
However, let’s focus on the first one. Is co-owning a home right for you? What should couples know about shared homeownership in order to prevent problems in the future? If you’re thinking about co-owning a home with your partner or spouse, here’s what to know.
What Does Co-Owning a Home Mean?
In legal terms, co-owning a home means exactly what it sounds like it means. Co-ownership of a home means that there are simply multiple people with an ownership interest in the property. This could mean that you and your brother own a house together, or that you and two other friends co-own a home together, or, as is the case with most married couples, you co-own the property with your spouse.
You don’t have to be romantically involved with someone to own a home with them, and you don’t have to even live together to co-own the home either. In non-traditional situations, co-owning is a way for the singles we mentioned above to enjoy the benefits of building equity when it comes to the shared ownership of a property.
In more traditional situations, co-owning a home is a way for a married couple to combine their incomes to be able to purchase a better (and more expensive) home than they might be able to purchase if they had tried to purchase it on their own.
The Pros of Co-Owning a Home
While you’ll want to have a lot of trust in whoever you are choosing to co-own a home with, there are actually quite a few benefits to this type of homeownership. Some of the biggest pros of co-owning a home include:
- Splitting the cost of a down payment and closing costs
- Saving money on monthly bills
- Building equity
- If you apply for a joint mortgage loan, you can benefit from a higher combined credit score if the person you’re applying with has a higher score that’ll bring your average up
The last point is particularly important to mention, as it’s something that most couples don’t even understand. If you plan on co-owning a home, you’ll likely be applying for a joint mortgage loan together. When doing so, your credit scores will be combined to form an average.
This means that if you and your spouse are applying for a joint mortgage loan and you have a credit score of 750 and your spouse’s score is 550, their credit score could ultimately bring down the overall average to 650. Yikes, right?
While that’s not always the case, those are the types of things you should understand before applying for a joint mortgage loan and thinking about co-owning a home.
The Cons of Co-Owning a Home
While co-owning a home is beneficial to most people, there are definitely a few drawbacks to consider before signing a mortgage loan and closing on a home. The most prominent drawbacks include:
- Shared responsibilities of loan payments (if one person can’t make the payment, whoever else is on the loan will have to cover their share)
- The buyer with the lower score typically determines the overall credit score for the loan and the subsequent interest rates
In most cases, when you apply for a joint mortgage loan with the goal of co-owning a home, lenders will combine both of your incomes and your credit scores. However, they don’t tend to average them out evenly.
Instead, they’ll usually look at the “lower middle score.” This means that they’ll look at all three scores (TransUnion, Equifax, and Experian) for both of you. You’ll each have a middle score (as the three scores usually vary slightly). Then, they’ll use whichever middle score is lower.
Example: Your three credit scores are 750, 747, and 724. Your middle score, therefore, is 747. Your partner’s three credit scores are 560, 555, and 547. Their middle score is 555. Since theirs is lower, the lender would typically use that score when it comes time to figure out loan terms and interest rates.
Qualifying for a Shared Mortgage
There’s really no “qualification” process you need to understand in terms of applying for a shared mortgage loan. However, you will want to be mindful of whether or not you, as a couple, qualify for different types of mortgage loans. This should be one of the first things you discuss after discussing your income levels, future plans, and credit scores.
For lower monthly payments, you’ll likely want to opt for a loan with a longer life, such as a 30-year fixed-rate loan. This means that you’ll pay the loan back over 30 years, and it will accrue interest at a set rate.
If you and your partner don’t plan on having the home for long, an adjustable-rate mortgage loan might be a better option. As the name suggests, this type of loan comes with an interest rate fixed for a set time, and then the interest rate changes after the introductory period expire.
Looking for the Right Mortgage Loan
If you’ve decided that co-owning a home is right for you and your partner, it’s time to start talking about your finances. First, you’ll want to make sure you’re both on the same page in terms of the type of home you’d like to buy, what you can afford, how you’ll plan your finances around that goal, and, of course, what your credit scores are.
Float can help with that last part. We’re a financial app for couples who want to check and improve their credit scores together. Simply put, we’re trying to make difficult financial conversations easier. Then, once you’ve both got your credit scores where you want them to be, you can browse mortgage loans on our loan marketplace.