When your clients say yes to mortgage, but no to marriage

by Melanie Kalmar

 

As millennials are famously delaying marriage, and homeownership remains the American dream, agents are guiding non-traditional homebuyers through the transaction process more than ever. Whether it’s unmarried couples, friends or relatives investing in a property together, agents can add value by making each party aware of the small details that can make a big difference going into a transaction.

Of course, that’s only part of it. Before clients reach the closing table, they should also have an exit strategy that will hold up in court and cover all the bases, from the handling of common, unforeseen circumstances to a simple change of heart. Realistically, nobody can predict the future but with proper planning, agents can help clients avoid trouble and feel good about saying yes to a mortgage without an “I do.”

Unanimously, mortgage experts suggest homebuyers meet with lenders and real estate attorneys before embarking on their property searches, to learn how to get the best terms on a loan, the smartest way to hold title and the many details to address in writing, to protect their investment should the relationship fall apart.

Four questions agents should ask clients

Daniel Eguiguren, a sales manager at Caliber Home Loans, likes to give agents a mini-crash course in mortgages, key information that they can relay to clients in preparation for their meetings with lenders like him. His first order of business is showing them how to determine whether or not someone is a good candidate for a mortgage now or in the near future, by asking them the following four questions:

  • What is the maximum amount of money you feel comfortable paying each month? With this knowledge, agents can determine the client’s price range for a home.
  • What do you do for a living? If the borrowers are self-employed, they have a lot of write-offs, which makes the lending process trickier. But knowing this in advance gives lenders more time to problem-solve.
  • How much money do you have saved up to buy a home? If they didn’t save enough money, find out if they have a relative who will gift them the down payment.
  • Do you know your credit score? Higher credit scores warrant the most favorable terms on a loan.

“Agents need to make sure they are asking those questions,” Eguiguren said. “When they ask those questions and then refer the client to a preferred lender, it’s a smooth transition.”

Married vs. non-traditional co-borrowers

Non-traditional households, mostly comprised of unmarried couples and parents co-signing loans for their first-time homebuyer children, are very common in South Florida, according to Eguiguren.

The only real downside to it that he has witnessed has to do with parents who co-sign a loan for their child. If their daughter or son misses a payment, it has a negative impact on their credit, he said. But that’s not all. If the parents decide to search for their own home a few months after they co-sign for their child, that debt goes against their debt-to-income ratio, explained Derek Fertig, area manager of Fairway Independent Mortgage Corporation. “They have to show a minimum of 12 months-worth of payments from their child’s checking account to get it excluded from their own mortgage,” he said. “If it’s less than a year, it’s considered their debt.”

Of course, this won’t make a difference for parents who have an abundance of wealth. Still, there is an upside for co-signers who are not incredibly wealthy. Once the child increases their income enough to handle the loan on their own, they can refinance and take their parents off of it, Eguiguren noted. Regardless, based on his experience, he would leave parents out of it altogether whenever possible. “If they are not married, the partners have to agree on everything,” he said. “If parents give you one-sided advice, it makes it complicated.”

Eguiguren recently had a parent tell his daughter not to lock-in the rate and it was terrible advice. “We showed her the market and she decided to lock in the rate rather than listen to her parent,” he said. “Be careful who you listen to. This is a big purchase.”

Eguiguren likes to educate agents on presenting offers for first-time homebuyers, because sometimes it makes more sense to pay the list price and ask for a seller contribution, instead of lowballing the listing. “Your typical scenario is someone offering $300,000 on a property and an agent going in at $280,000 to try to bring down the price of the home,” he said, noting in instances where the buyer has enough money for the down payment, but they cannot afford closing costs, its best to offer the seller the list price and ask for a $20,000 seller contribution toward closing costs. “It will be the same,” he said. “The seller will still get the $280,000 but it will be more helpful to the buyer to have money in their pocket, than get a reduction in sales price.” In the South Florida market, it has proven to be a successful strategy for him.

Think before you leap

Before an unmarried couple buys a home together, Michael Murgatroy, senior vice president of mortgage lending and branch manager at Guaranteed Rate, makes sure they are all in, because unlike married couples, who hold title as joint tenants with rights of survivorship, unmarried couples don’t have the same protections. For example, leaving one partner off the loan makes the other person liable for the mortgage note, Murgatroy said. “You don’t have that other person on the hook. They can just leave you. If you cannot afford the mortgage by yourself and the house gets foreclosed, your credit is ruined.”

However, it’s not all doom and gloom. Murgatroy noted that many consumers who suffered this type of fate rebounded quickly after the housing crash in 2006-2009 and purchased homes within two to seven years following a foreclosure. Granted, loan limits are different in every county throughout the U.S., he said, and borrowers will pay a price in the rate and possibly fees. But they still get another chance at the American dream.

Fertig doesn’t like to get into clients’ personal business. After all, he’s not a counselor. But if this question comes up between two unmarried borrowers: “What happens if it doesn’t work out between us?” Fertig has an honest conversation with them about the importance of answering that question with a real estate attorney, putting all of the details in a document that will hold up in a court of law and determining the best way to hold title. “The only pitfall is if the relationship doesn’t work out,” he said. “It’s always good to make sure, in case of an emergency, that each person is able to carry the mortgage payment on their own.”  

Fertig’s advice to agents is to first get clients in front of the person who handles the financing. “If there are credit issues — sometimes people are thinking of switching jobs, selling stocks or pulling money from retirement accounts for down payments — make sure you have a sound game plan,” he said. “Twenty-five to 30 percent of the time, we get buyers already under contract assuming that they can purchase the place. It puts us on the defense right out of the gate. You have to react to the situation and try to steer clear of any pitfalls you don’t even know are there.”

Murgatroy stands by the same philosophy. He wants to see clients early, whether they are buying a home in one month or 12 months, to analyze their budget, credit, income, assets and any real estate they own. “We break down the process and make it simple,” he said. “We go over their goals and steer them toward a product that’s best for them.”

Choosing the right loan product

The same loan products that are available to married couples, such as FHA, conventional loans, first-time homebuyer programs, jumbo loans and VA program offerings, are all available to non-traditional households, Murgatroy said. However, the drawback of a VA loan for an unmarried couple is only the veteran can go on the title, not their partner, which means it might not be the best product for non-traditional households.

At Guaranteed Rate, Murgatroy often comes into a transaction after multiple lenders could not figure out how to make it work. From a mortgage perspective, he gives clients the best program based on credit, income and assets.

“Unmarried couples buying a house together have to make sure they do their due diligence, in regard to talking to a real estate attorney about how to title the property, a CPA about tax deductions and financial planners,” Murgatroy said. “They have to buy it properly to protect themselves.”


Also in this issue

‘Atypical’ is the new buyers

Legal structures for friends and family

Unwinding partnerships: When one party wants out of a mortgage

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