As the Millennial generation (ages 18-34) continue to buy homes, they are often buying homes with others (in a non-married status). While lenders know that this is one path to them being able to afford a home, it is important that the borrowers go into the process with a few things in mind. And it is important for the borrowers to discuss the situation with the loan officer.
Usually this situation involves creating a pre-purchase agreement, although many couples who have just decided to live together are understandably reluctant to discuss how they will want to deal with breaking up the partnership. A pre-purchase agreement that the house must be sold if either partner aborts the relationship avoids some thorny issues that can arise when one partner stays with the house. But if the house is sold, how are proceeds to be divided?
One approach is to divide the net proceeds by each partner’s contribution to the equity in the house when it is sold. This should include the down payment, settlement costs, share of principal, and ongoing expenses. But often one of the partners might unilaterally work on improving the house, which would call for a higher share. The point is that the partners ought to agree on the general formula at the outset.
When one of the partners remains in the house, the terms of settlement are more complex, especially if the other partner’s name is included on the home loan. There is no sale price, so the partners must agree on an appraisal procedure, who will pay for it, and whether a real estate sales commission should be deducted from the valuation used in the settlement.
And what about paying off the departing partner, especially if the partner remaining in the house doesn’t have the money to pay off the partner who is leaving? A home equity loan is not possible unless both partners become responsible. The departing partner continues to be responsible for the mortgage. It is best to confer with a trained loan originator during the process. They can discuss future considerations in this situation.
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