Buying a home is likely one of the biggest investments you will make in your lifetime. Frequently there is someone included in the purchase of the property.
When you are deciding to buy a home you often plan to involve a partner with the purchase of that new residence. The problems associated with purchasing a property with a partner tend to be at the termination of the relationship than at the initial purchase. An agreement should be legally drawn up to address potential problems.
When a couple splits does that mean they have to sell their home? Now this is an issue that can be addressed in the partnership agreement. You need to establish whether the shares in the property will be divided equitably or should one partner receive a greater share of the estate if the split is resulting in a sale. For instance, if a home is purchased and one of the partner's supplies the complete down payment for the property, then that partner should be reimbursed for their initial contribution.
Yet another approach to this issue is to divide the net proceeds of the home by each partner's contribution to the home. As an example, assume the partners buy a home for $100,000 and pay $20,000 down payment and an additional $3,000 for closing costs. They then sell the house after 5 years when the loan balance is $74,000. The total contributions of the partners to equity in the house at the time of sale are $23,000 in cash at time of the purchase, plus $6,000 in reducing the loan balance. If one partner contributed 60% of the cash and 40% of the expenses, that partners share of the net proceeds would be [.6(23,000] + .4[6,000]/29,000, or 56%] 56%.
The point of both of these scenarios is that the partners should agree prior to purchasing a home together how assets will be divided in the event of a split. If they can not agree, then they should really re-consider their decision to buy a home together.
When one of the partners stays in the home, it can create some contentious issues. The terms of settlement are more complex than if the house is just sold. Since the house has no sale price, how is value determined? The partners must agree on an appraisal procedure and on who will pay for the appraisal. They should also consider whether a real estate sales commission should be deducted for the assessed value.
If the partner staying doesn't have the money to pay the partner leaving the home, it can create another issue. The more equity they have in the home, the more cash the partner residing in the home needs to raise. A home equity loan is not possible unless both partners can continue to be responsible for the loan. A departing partner will want to relinquish all interest in the property.
The largest problem that usually arises is the departing partner's continued responsibility of the mortgage. Many partners believe that the remaining partners consent to assume all mortgage responsibility of the mortgage dissolves their mortgage responsibility. The lender is not part of any agreements with the partners and continues to recognize both partners as responsible for the mortgage. With the departing partner still responsible for the mortgage on the home they have left they are often unable to obtain a new mortgage for their own home.
A lender has no incentive to remove one partner from the mortgage. Some lenders will agree to do it if the partner remaining with the house has a perfect payment record and can document that they are solely responsible for the payments. This can often take a great deal of time so be prepared. If the lender refuses to do this then the only way to get the departing partner off of the first mortgage is for the remaining partner to refinance in their own name.
It is simple really, any time you purchase a home with a partner; marital or otherwise, then it is prudent to have an agreement signed that divides assets from your home equitably in the event of a split.
