Newly married couples may envision starting life together in a new house — one they both own. That’s a decision that can also make smart financial sense.
“I feel homeownership and real estate are a valuable cornerstone of building wealth,” says Kathy Costas, vice president and advisor with EP Wealth Advisors in Westlake Village, California.
However, not every couple should jump into homeownership right away. Newlyweds with significant debt and low credit scores or those who think they might move again soon may want to defer purchasing a home.
When Should Married Couples Buy a House?
There is no hard-and-fast rule about when to buy a home. Some couples may want to pay off student loans or wedding debt before taking on a mortgage, while others may feel comfortable adding a house payment on their income.
“It’s unique to each and every couple,” says Carolyn Morganbesser, assistant vice president of mortgage originations for Affinity Federal Credit Union in Basking Ridge, New Jersey.
For those who want to buy a house, purchasing one sooner rather than later can have benefits.
“Buyers can get today’s prices before homes in their market appreciate, and savings can be invested into a home that appreciates,” writes Jeff Taylor, founder and managing director of Miami-based mortgage solutions provider Mphasis Digital Risk, in an email. Couples with a high debt-to-income ratio may not qualify for a loan, though, according to Taylor.
Couples should also consider how long they plan to live in the home. “You don’t have to die there, but (live there) at least five years,” Costas says.
Anything less, and you aren’t likely to come out ahead financially when you factor in closing and moving costs. Plus, if you own the home for less than 24 months, you could end up paying capital gains tax on the entire appreciated amount when you sell.
“Homeownership isn’t a great investment,” says Russell Hackmann, president of Hackmann Wealth Advisors in Boston.
He acknowledges that’s not a popular opinion, but he thinks homeownership typically makes sense only for those who plan to remain in one place for 10 to 20 years.
A final consideration for couples is the cost of homeowner association fees, utilities and property maintenance, according to Costas. Mortgages aren’t as cheap as they used to be and when all these other expenses are factored in, homeownership may no longer fit in a new couple’s budget.
“We have an unusual situation with interest rates where it can actually be cheaper to rent,” Costas says.
[See: Best Mortgage Lenders for First-Time Homebuyers]
The ‘Low Middle’ Rule: How Your Spouse’s Credit Score Could Tank Your Rate
A person’s credit score is used to determine their mortgage terms and interest rate. With a joint mortgage, there are two people’s credit scores to consider.
“We’re going to use the low middle,” according to Morganbesser. In other words, lenders look at credit scores from all three major credit reporting companies — Equifax, Experian and TransUnion — and then base the loan terms on the middle number of the person with the lower scores. “That’s going to affect your interest rate, which is going to affect your buying power,” she says.
“If the lower score removes viable loan options or sharply increases rates, lenders can advise on whether rapid credit score improvements are possible based on each borrower’s credit report history,” Taylor says.
In some situations, that may not be possible and couples are left with two options: Accept a higher interest rate on the loan or get a mortgage in the name of one spouse only.
Buying Solo: When It’s Smarter to Leave One Spouse Off the Mortgage
Married couples don’t have to get a joint mortgage. “They can do the mortgage in one name, but they can both be on the deed,” Morganbesser says.
If you get a mortgage in the name of only one spouse, their credit score alone will determine the interest rate. The downside is that only their income can be used to qualify for the loan.
“Maybe, single, you get a better rate, but maybe together you can buy more (house),” Costas says.
Either way, should the marriage dissolve, couples in community property states will split the home 50/50 during a divorce, according to Costas. The property will likely be considered a marital asset in other states, she says, but its value may not be split evenly there.
“For married people, it’s nice to own and buy in both people’s names,” Hackmann says. Still, “If one person has disastrous credit, then the home purchase might need to be in the other person’s name alone.”
Buying Before the Big Day: The Risks of Purchasing While Engaged
There’s no need to wait until after the wedding to buy a house. Property can be purchased as joint tenants with each person listed on the title and mortgage. Going that route does come with a risk, though.
“I’ve seen people who are engaged and want to purchase before the wedding and then there is no wedding,” Morganbesser says.
If a relationship sours, owning a house together can make an unhappy situation worse. “That can be an unpleasant thing to unwind,” Hackmann says.
However, assuming you live happily ever after, purchasing a property while engaged is similar to buying one after the wedding. You may need to update a name on the mortgage and title afterward, but that typically isn’t a complex or involved process.
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Is a Joint Mortgage Right for You? How One Spouse’s Credit Could Cost You Thousands originally appeared on usnews.com