When couples purchase a home together, many desire a 50/50 split of the ownership rights and mortgage obligations that come with their homes. For some, however, that option may not make financial sense or may not even be available. Either way, buying a home is one of the biggest transactions in most people’s lives, and it’s important to understand the impact of whose names go on which document.
Mortgage vs. title
When it comes to obligations and the ownership associated with a home, the mortgage and the title are important but distinct documents. The mortgage is the contract to pay back the loan amount borrowed to purchase the home and the title confers the rights of ownership and possession of the property. Many couples put both names on both documents, but it’s not required and may not always make the most sense.
Names on the mortgage
It’s common for there to be two names on a mortgage. This obligates both parties to ensure the mortgage payments are made on time and is often considered the most equitable arrangement.
So why do some couples only put one name on their mortgage? One big reason is the mortgage qualification process.
If there are two borrowers on a mortgage, the lender will look at the three FICO Scores of each borrower and use the lowest middle score when qualifying the loan. If one borrower has a weaker score than the other, it might increase the cost of the loan or disqualify the borrowers from obtaining the loan altogether.
The solution to this problem may be to put only the borrower with the stronger credit score on the mortgage. However, this also means only that borrower’s income can be used to qualify the loan, which may reduce the maximum size of the loan.
Before committing to a mortgage, it’s worth taking some time to evaluate the pros and cons of having one, the other or both borrowers on the mortgage.
Names on the title
Even if someone’s name isn’t on the mortgage, having their name on the title makes them an owner. It’s generally best to choose which names will go on the title before the closing as adding a name afterward could be difficult or impossible until the mortgage is paid off.
Predicaments can arise if the relationship sours. With two names on the title and one on the mortgage, one partner would be solely obligated to pay for a home with shared ownership. If one person didn’t have their name on the title, they may not have ownership rights to the home. (Laws vary state by state).
Trust goes a long way in many relationships, but the long-term ramifications of mortgage and title documents shouldn’t be ignored. Make sure you consider all angles when deciding whose names go on each document.