You’re going to the chapel and gonna get married. Congrats! Beyond the dreams though there are some harsh money realities to consider. What do you do if one of you has lots of debt or is starting a business with little income to show right now? If you’re looking to buy a home, should you apply for a mortgage loan in the name of the one who has the steadier job and less debt? Here’s what to do when love meets debt.
As a former mortgage lender, I’ve run into folks in a similar situation.
Buying a property before you’re married presents several challenges. I’ve seen folks buy and finance a property jointly when they get engaged only to call off the planned nuptials. You’re both on the hook for the loan. You’d have to unwind it by selling the property or refinancing to “buy out” the other person in that case.
You should buy a home for the right reasons and not because of tax issues or feeling that you’re missing out as you continue to see prices rise. If you’re likely to have to relocate for your job within three years, you’d be better off renting. If your income is variable or with an employer that may be prone to layoffs, you may want to consider saving your cash as a reserve and continue renting.
On the other hand, if you need the space especially for a home office or a growing family, then a purchase may make more sense.
Assuming you’re buying the home for the right reasons, then it is best to qualify for the loan based on your income solely. Conventional and FHA lenders will want to see a two-year history (as noted in filed tax returns) to document income from someone operating as a self-employed business owner (Schedule C if a sole member LLC).
You may need to ask the lender about how they treat assets. To avoid the complication of “gift letters” from your fiance, you should be sure to know how the lender will count accounts (i.e. checking, savings, money market) with joint names on them as they may be the source of your down payment.
In some cases, the lender will allow both of you on the title of the property (probably as tenants in common until you get married) if she also signs the loan application. In this case they will also use her credit score and debts in figuring the debt-to-income ratios. Remember that lenders will use the middle credit score of the lowest set of scores between the applicants. If her credit score is lower, you may want to leave her off the application. If her credit score is higher, then you may want to include her even though there is an impact on the debt ratios. Why? Your interest rate will be based on “risk-based” rules which are based on things like credit scores and if her scores are high enough to qualify for a lower rate that offsets the impact of the debts, you may want to go that route.
Even though the lender will not count your soon-to-be spouse’s personal or business debts if she’s not on the application, it’s a good idea to figure out how her income and debt will impact your combined household cash flow. Starting a business can involve unexpected cash outflows and low to no profit for a while. It’s best to plan ahead to be sure that this will not cause a financial strain and in turn an emotional strain for both of you.
If you’d like an objective second opinion about your finances and are looking for a road map on how to live better by planning well, please reach out to Steve Stanganelli, CFP®, CRPC®, AEP® at Clear View Wealth Advisors, LLC. Email him at Steve@ClearViewWealthAdvisors.com.