Each Monday we’re tackling one of your pressing personal finance questions by asking a handful of money experts for their advice. If you have a general question or money concern, or just want to talk about something PeFi-related, leave it in the comments or email me at [email protected].
This week’s question comes via email from a reader who wishes to remain anonymous:*
I just bought a house, and will be getting married in the next year or so (we haven’t set a date). My fiancé and I will be using the house as our primary residence. I purchased the home using only my credit, considering only my salary and assets when applying for the mortgage loan. No payments have been made yet (well, except the down, which was all me) but we have a verbal agreement to pay 50% of the mortgage apiece. I know every marriage isn’t successful. Should we, then, pursue a legal property agreement of some sort specifying exactly what percentage of the total home equity each person has PRIOR TO getting married? We don’t have any additional assets, so a pre-nup doesn’t seem necessary. My fiancé is OK with gray areas, but I’m not, and I like the security of clearly specifying things beforehand.
This is what individual experts have to say generally about an issue that affects each person differently—if you want personalized advice you should see a financial planner.
Consider What Makes You the Most Comfortable
The key to answering your question is in the last sentence. Your fiancé may be comfortable with gray areas, but you’re not—so having something in writing makes sense. And chances are, you know that already.
Money is the number one stressor in relationships. A written agreement won’t solve all potential future problems, but it will make them easier to manage should you and your fiancé ever break up, and it will give you peace of mind regardless. Things happen, and you need to protect yourself, especially because it sounds like you’ve taken on all of the liability.
It’s not romantic, but it’s realistic. So look into a cohabitation agreement, which is similar to a prenup, and will formalize any verbal agreements you’ve made.
“If you intend for your partner to become an owner of the property, you can stipulate this too,” says Jennifer McDermott, finder.com’s Consumer Advocate, about the agreements. “It may feel very formal, but it’s well worth investing in to avoid any problems down the track.”
Preferably you would have done this before signing the paperwork, but it’s not too late. A real estate lawyer or family attorney can draw up a cohabitation agreement for you, and it should include how the home’s equity will be split, what will happen if you break up, who’s responsible for other bills (utility, cable) and repairs, what happens if one of you can’t pay your half, what happens if one of you wants to sell the house one day, or if one of you passes away, etc. This is particularly important for you, as you’re the one who paid the down payment and it’s likely your name on the dotted line.
It’s in Your Partner’s Best Interest, Too
Your partner may be fine with gray areas, but you should explain that drawing up an agreement is in their best interest, too. If your partner doesn’t hold title, they don’t have equity in their investment, even if they make half the mortgage payments.
Another thing to keep in mind: You need to plan for incapacitation or death, no matter how morbid that may seem. “If you die without a will and you wanted your property to go to your co-owner, unless it’s specified in a will, that won’t happen,” Debra Neiman, a Certified Financial Planner, told Bankrate. “It might go to your parents. And perhaps your parents weren’t supportive of your relationship.”
“If you want your significant other to be in charge of decisions relating to your care if you’re ill or to receive any benefits from your retirement plan, insurance policies or assets in the event of death, you need to put this in writing,” adds McDermott. “Update them as the beneficiary on any policies and ask an attorney to draw up a Financial Power of Attorney.”
Here are some other things to keep in mind:
Get financially transparent. “Before making such a big step such as moving in together, it’s important to be upfront about any financial skeletons in the closet,” says McDermott. “Points you should cover in this discussion include what your attitudes toward savings and spending are, your credit history and details of any debt.”
Set up a joint bank account where each half of the mortgage can be direct deposited.
Create a budget for home costs. “Setting up a new home can be expensive and there will be items that mean more to one party than the other. Avoid arguments by agreeing who is buying and ‘owning’ big ticket items such as the sofa or big screen TV,” says McDermott. “Keep a record of purchases to avoid any disagreements on ownership in the event of a split.”
Discuss how household duties will be split and who will be responsible for making repairs or hiring someone to do them. What happens, for example, if you need a new roof? Will you pay for it, or will it be a joint expense?
Consider what happens if you can’t make mortgage payments. You said that you used your credit to buy the house. That means if you and/or your fiancé miss a payment, it’s your credit that takes a hit.
What happens if you have children? This is another discussion you’ll want to have before you draw up your agreement.
You want to do what will make you the most comfortable while minimizing arguments and potential legal battles down the line. Don’t leave any “what ifs?” hanging.