Unmarried? Buying a Home Together? Read This!!!

Buying a home means making a number of decisions with your money, investment planning (remember, your home is an investment), and we must consider how to accept title in our new home as part of our estate planning. Generally,  California is a community property state. In California, a 50/50 division of community property between a married couple is strictly mandated by statute, meaning that the focus then shifts to whether particular items are to be classified as community or separate property. If one owned property prior to the marriage, that property can be vested as “Sole and Separate Property,” meaning that it belongs entirely to one party in the marriage.

Typically, in the absence of a Living Trust, married couples in California take title to property as joint tenants or as community property. But what if you are not married? What if you are cohabitating with someone and you decide to buy a house together?

Unmarried couples have many of the same decisions to make as married couples when it comes down to home purchasing. One of the most important is how to take title of the home. This can determine what can happen in the case of a dissolution of the relationship or a death of one of the parties to the home’s purchase. Let’s take a look at the different vestings available to unmarried couples and some of the details involved with each particular vesting.

To be sure, I am not an attorney. The information I provide here is rather basic so for additional details, please consider consulting with a Realtor, a lawyer or an investment adviser who can help you with some estate planning.

Individual vesting: In this case, only one individual of the unmarried couple owns the property and owns 100% of it. The other individual has no ownership involvement or rights. If the owner dies, the surviving member of the couple is out of a home unless the beneficiaries selected by the decedent (dead) owner allow him or her to continue living in the home with a rental agreement. The owner can bequeath the property to their unmarried partner in a will but that opens up a can of inheritance taxes and Legal issues.

Tenants-in-Common: This vesting is most common for investment properties with multiple owners. In the case of unmarried couples, some people like to retain what is theirs or at least have a dividing line to say this part is mine and that is yours. This is particularly acute when one party to the transaction provides a larger portion of the down payment of a new home. Tenants-in-common allows each borrower to delineate their ownership percentage of the home. If two people have equal down payments and will share 50/50 in the mortgage, the percentage could be set at each owning 50%. If the down payments are unequal or one party will be paying a significantly larger portion of the mortgage, the couple must work out who owns what percentage; 40/60? 30/70? Also, in Tenants-in-common each can leave their portion of the home to their own selected heirs. Their ownership does not automatically revert to the surviving tenant or tenants. You can leave your ownership interest to the dog if you want! This creates some sticky situations if the decedent tenant leaves their portion of the home to someone with whom the surviving tenant does not get along.

Joint Tenants: In Joint Tenancy, the owners own 100% of the property together. There is no delineation of who owns what percentage of the home. Joint Tenants must both sign documents when transferring the property or using it as a security for a loan. Joint Tenancy is often written on title documents as “Joint Tenants with right of survivorship,” meaning that when one tenant dies, the other tenant inherits the property and owns 100% of it. That tenant now owns the entire home and has the right to select his or her own beneficiaries for the home in the case of their own death.

Community Property (with right of survivorship): This vesting is intended for married persons or domestic partners. Similar to Joint Tenants, the tenants own 100% together. There is no delineation of ownership percentages. Since all such property is owned equally, both parties must sign all agreements and documents transferring the property or using it as security for a loan. Adding the “with right of survivorship” may add some tax advantages. On the death of an owner, the decedent’s interest ends and the survivor owns all interests in the property.  

Trusts: Unmarried people may also take ownership in the form of a trust. The trust documents will determine each parties’ (trustees) ownership percentage and will determine what takes place upon the death of a trustee. In this case, funds could be left to the surviving trustee or decided in advance who will inherit the ownership. They can also designate who would manage the trust (successor Trustee) in the case both owners perish at the same time.

If you are unmarried and thinking of buying a house, this is a great time to do it. Despite the lack of inventory in some areas, interest rates remain historically low. There is a lot to take into consideration when purchasing a home such as the neighborhood, schools, transportation availability, shopping,  down payments, loan terms, and how you will take ownership; your vesting.

When the time comes to purchase your new home, don’t forget to check your credit union’s mortgage rates. Judging from the volume of home purchase loans we are doing today, our interest rates and loan terms must be very competitive!

Link for additional information: http://www.clta.org/for-consumers/consumer-holdingtitle.html

This link is to the California Land Title Association's website for vesting information.

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Free Financial Education Class:
Credit Myths & Credit Repair
Wednesday, May 28, 2014 - 6:30-7:30 p.m.
Chesbro Financial Center

5615 Chesbro Ave, San Jose, CA

Your credit is one of the most important things you need to know the FACTS about. Protect your credit by learning about credit Myths vs. Facts.

Let's Compare FHA vs. Conventional Mortgages Today

Today’s blog is a guest blog from Dan Hapner, the Director of Mortgage Sales at Meriwest Mortgage.

With home sales continuing to grow and the expectation that interest rates may be on the rise, let’s pause to consider the best loan products we might use for our next home purchase. FHA is a popular option for some families and I think it is important we understand the distinct differences between this form of government sponsored loan and a regular conforming conventional loan that is underwritten according to guidelines provided by Fannie Mae (Federal National Mortgage Association) or Freddie Mac (Federal Home Loan Mortgage Corp).

FHA Loans

The FHA, Federal Housing Administration, has been helping Americans own homes for 70 years. The FHA guarantees or insures home loans made by their qualified member lending institutions. This allows homebuyers to access a home without having to come up with a large downpayment. Typically, conventional mortgages require a 20% downpayment. FHA guaranteed mortgages can be made with as little as 3.5% downpayment! That downpayment can be 100% gifted to the borrower. There is no “seasoning” requirement of having the funds on hand 90 days prior to the purchase.

FHA guaranteed loans can be adjustable or fixed. They also have two graduated payment programs that can help families get into their first home at a reduced monthly payment that will grow as their income grows. Most of the FHA guaranteed loans are made at a fixed interest rate and is typically lower than a conventional loan.

How does it rate as a first time homebuyer loan? Not bad, but the news is not all good either.

The Good: FHA requires a FICO score of 580 for the 3.5% low downpayment program.

Many participating FHA lenders require a FICO score of at least 620 in order to qualify for an FHA home loan. Just because the FHA minimum is 580 does not mean a particular bank is willing to issue credit to those with that score--the FHA loan program is a voluntary one, lenders are not required to participate, and the FHA cannot force the bank to lower its FICO requirements. These FICO scores are significant as most conventional loans require a FICO score of 680 or better. Another advantage for FHA is the maximum loan limit is $625k vs. $417k for a conventional loan. FHA maximum’s are increased in areas with high priced housing such as the San Francisco Bay Area to $729,750. FHA loans often allow for a higher debt to income ratio, making more borrowers eligible.

The Bad: For most FHA loans, the sellers will pay the closing costs. This can be an impediment to selling to a particular buyer if they intend to use an FHA loan. Closing costs can be very expensive for the seller and make an FHA loan difficult to use for the buyer. This is particularly true in the case of a short sale home if the sellers don’t have a lot of cash on hand or equity. The sellers need to be flush with cash or equity in the case of a buyer with an FHA loan.

First time homebuyers need to be aware of the costs involved in using an FHA loan to finance your home purchase. As the loan is not a conventional loan, it is going to require mortgage insurance. FHA mortgage insurance will cost the buyer 1.5% of the total loan amount upon closing and then 0.5% of the loan each year to pay for the mortgage insurance. On a $400,000 loan that would mean a mortgage insurance cost of $8,000 in the first year; the upfront insurance payment of $6,000 at closing and then $2,000 the first year in annual premiums. The mortgage insurance stays in effect for the life of the loan. The only way to eliminate the insurance is through paying off the loan or through refinancing.

Another issue involved in FHA lending is the approval of the property. The property must meet FHA standards. If the collateral is not up to FHA standards, the seller must pay for repairs. This can be an impediment for sellers with homes that need a little work. If a house is being sold “as is,” it may not be a good target for an FHA type loan.

Time is also a factor. FHA loans typically take longer to process than a similar conventional loan.

Conventional Loans

Most of the mortgages made in the United States are conventional mortgages. These are used for purchase and for refinancing an existing loan. They can be an adjustable loan or a fixed rate type of loan. As most lending institutions offer conventional home financing and set their own interest rates, borrowers can have a wide range of lenders and interest rates from which to choose. FHA loans are limited to approved lenders.

Generally, conventional mortgages require a 20% downpayment for home purchase transactions. A purchase with less than 20% down would require private mortgage insurance (PMI) be paid for by the applicant. PMI generally costs 1% of the total loan amount annually. The insurance payment is usually included with the loan payment. A $400,000 mortgage that requires PMI would have a charge of $4,000. That would add $333 to each monthly payment.

Conventional loans also require an applicant have a 680 or better FICO score. This is higher than an FHA loan, but less than is required for most consumer loans which is 740.

There are fees involved with conventional loans, such as processing fees, application fees, and appraisal fees. But if one is willing to pay a slightly higher interest rate on their loan, they can avoid fees altogether. By paying an additional point or one percent of their loan amount upon closing, they can pay down their loan interest rate and possibly save themselves thousands of dollars over the life of the 30 year loan. Conventional loans have a lot of options when it comes to interest rates and fees.

There are local government and non-profit programs that can provide some downpayment assistance and thus decrease the downpayment needs. As an example, Meriwest Mortgage works with the Housing Endowment and Regional Trust in San Mateo County, HEART of San Mateo. They offer homebuyers up to $78,225 in downpayment assistance and that can offset up 15% of the purchase price with just 5% down. These downpayment assistance programs can be used to eliminate the need to pay for mortgage insurance and can be very helpful in making a home purchase more affordable for first time homebuyers.

As conventional loans are offered all across the country in every municipality, there is a great many lenders from which to choose. Competition is your friend and keeps fees down and processing times speedy. Most of the HEART Program loans are processed in less than thirty days and are often completed and closed in only 20 days!

As we saw with the need to provide PMI in cases of small downpayments, there are some warts on conventional loans. As these loans are sold on the secondary market to Fannie Mae and Freddie Mac once processed and booked as a mortgage backed security, borrowers have fewer options in regard to default. What this means to a borrower is the issuing lender does not own the loan and thus has no control over the default process and cannot make arrangements with the borrower to reduce interest rates, payment forbearance, etc. Currently, these borrowers are being encouraged to take part in the HARP and HAMP Government Programs to help families in foreclosure.

In conclusion

Let’s keep in mind that the United States Government does not make home loans. They guarantee or insure home loans. What this means is the lender is insured against loss by default of the borrower. It does not insure the borrower or guarantee the borrower against default in any way.

Do you have more questions about a future home purchase or a refinance of your existing loan? Please contact Dan at dhapner@meriwest.com.

Meriwest Mortgage and Meriwest Credit Union are Equal Housing Lenders.

Meriwest Credit Union deposits are insured up $250,000 by the NCUA

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Our next set of workshops will be taking place at our Sunnyvale Financial Center at 563 E. El Camino Real in Sunnyvale, next to Togo's Sandwiches. To attend, please RSVP with Greg Meyer at gmeyer@meriwest.com or 408-365-6328.

Auto Finance 101 - Learn the in's and out's of purchasing a car. Research your car and your financing. Learn how to make the deal and avoid dealer tricks. Negotiate your purchase price, interest rate, and terms.

6:30PM - 7:30PM on Oct. 16th

Sunnyvale Financial Center

Credit Myths and Repair - Learn how to access your credit report from all three credit bureaus and your credit score for free. How do inquiries effect your score? What happens to your credit after you pay a collection? Have a late payment? Get a divorce?

6:30PM - 7:30PM on Oct. 23rd 

Sunnyvale Financial Center

Meriwest Credit Union

CAR SALE!!!

 November 9th and 10th at the Meriwest Credit Union Main Office 

5615 Chesbro Ave, San Jose CA 95123

Come to see our wide selection of late model, gently used cars offered at bargain prices by our MCU approved dealers.