Since it’s time for Valentine’s Day, it seems now would be a good time to discuss what steps you and your significant other should take if you’re considering buying a house together. No. 1 on the list: finances. While a discussion about money can be uncomfortable, it’s important. A lender will look only at the cold, hard numbers. Even if one person’s finances are in order and the other person’s aren’t, it could jeopardize your home-buying dreams. Here, Realtor.com poses three questions a couple should ask one another if they’re thinking about purchasing a house.
How much debt do you have?
If you two are serious, odds are you’ve talked about each other’s incomes, but if you’ve never talked about debt, you might want to brace yourself for some surprises. Many people have student loan debts. In fact, Pew Research states that 37 percent of people ages 30 and younger still owe anywhere from $25,000 to $45,000 for their education. You also should both come clean about credit card debt. The reason: Any debt you’re carrying will show up once you undergo the pre-approval process for a mortgage, car loans, personal loans and even child-support obligations. All of this matters because of your debt-to-income ratio, which is a number your lender will look at to decide if you can afford to pay back a loan. To arrive at the number, a lender will add up all of your monthly debts and divide them by your combined monthly income. To qualify for a mortgage, that number cannot be more than 43 percent, according to the Consumer Financial Protection Bureau, but ideally should be under 36 percent. For example, if your joint take-home income is $8,000 a month and you pay $1,000 a month toward debts, that would mean your debt-to-income ratio is 12.5 percent. Add in a mortgage, and that number changes. In this scenario, a monthly mortgage payment of $1,880 would boost this debt-to-income ratio up to the recommended max of 36 percent. If you’re not sure, punch your numbers into an online home calculator to get a ballpark idea of how much home you can afford.
What’s your credit score?
This number represents how well you’ve paid off past debts, and it’s important to lenders because that number shows how likely it is that you’ll make your future mortgage payments. A low credit score could disqualify you from getting a loan, or it could mean you won’t get the optimal rates. Both you and your partner will have your own credit score; they’re not even combined for married couples. To check your score, request a free copy of your credit report at AnnualCreditReport.com, and pay a small fee for your actual score. A credit score over 700 is ideal, while the minimum credit score required for a mortgage among most lenders is about 660.
How much money do you have for a down payment?
The two of you ideally will be able to put down 20 percent on a property. On a $300,000 home, a 20-percent down payment is $60,000. You’ll also need to pay closing costs, which can range from 2 percent to 7 percent of the purchase price of the home. Your down payment can come from savings, a gift from a family member or a portion of a retirement account. Another option is putting down less, with some mortgages accepting as little as 3 percent. However, then you’ll be required to pay an extra monthly private mortgage insurance fee.
Who owns (and is paying for) what?
Before signing any paperwork, you should talk about who will be responsible for how much of the payment and whether you will be able to afford your part of the contribution. Discuss what is going to be comfortable for each of you going forward. You also should talk about whether both of your names will be on the title, which is the legal document that proves you own the property. If you’re both contributing to payments, both people should be on the title. Depending on your marriage status and what state you live in, one of you may not legally co-own the home.
What happens if we break up?
In case of a split, you should have a plan in place. Consider putting together a contract specifying what would happen to the equity and who would be responsible for the payment in case the relationship ends. If one person contributed more to the down payment or pays more of the monthly mortgage payment, will that person retain a bigger share of the equity, or will you split things equally? If you break up, will the house be sold and the proceeds split, or could one partner buy out the other? Having these conversations before something happens will protect both of you.