Thursday, 29 October 2020

In a Domestic Partnership? What you Need to Know About Your Mortgage

In a Domestic Partnership? What you Need to Know About Your Mortgage
12 Mar
4:19
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Domestic partnerships can be the source of a lot of confusion. While they were once commonly referenced in relation to same-sex couples, they are also an option for opposite-sex couples who have a long-term commitment. They allow committed partners to access some of the rights afforded married couples, such as sharing of employer-provided health benefits.

As non-traditional families have evolved over the years, questions inevitably come up about how to handle joint assets purchased and debts incurred within a domestic partnership. Since a mortgage is likely the largest debt a couple will have in their lifetime, it’s important to understand what you need to know if you have a mortgage in a domestic partnership.

What is a domestic partnership?

A domestic partnership is a legal agreement created to formalize a relationship between a couple so they can obtain some protections under the law. Domestic partnerships are usually formed by signing a state registry, but can also be created privately in states that don’t recognize them.

In the past, domestic partnership have mainly been characterized as alternatives to marriage for same-sex couples. Up until a landmark Supreme Court ruling made same-sex marriages legal nationwide, domestic partnerships were a common option for same-sex couples to be given some of the basic legal rights as married heterosexual couples, such as sharing of employment insurance benefits.

However, opposite-sex couples may choose domestic partnerships over marriage for a variety of reasons, financial or philosophical. There are important things that domestic partners should know about mortgages, regardless of whether the partnership involves a same-sex or heterosexual couple.

It’s important to know that domestic partnership laws vary drastically from state to state. Some only provide marriage alternatives for same-sex couples, while others will only grant the domestic partnership rights to opposite-sex couples over age 62. Be sure you know the laws regarding domestic partnership in your state, or how to protect yourself legally if the state doesn’t recognize them at all.

Why choose a domestic partnership?

Until the late 20th century, domestic partnerships recognized heterosexual couples who lived in relationships that had had the commitment of marriage, without actually getting legally married. Over time, state laws began offering them legal rights under common-law marriage statutes, and the term was expanded to include unmarried couples who lived together in a committed relationship.

According to a Pew research study, the number of couples unmarried but living together reached 18 million in 2016. That’s an increase of 29% from 2007.

The reasons for entering in a domestic partnership range from just not wanting to get married, to wanting a more structured commitment without the formality of marriage. There may be financial benefits when it comes to insurance coverage, and because most state laws regarding dissolution of a relationship are related to marriage, ending a domestic partnership may come with fewer strings attached.

In order to qualify for any benefits, domestic partners must meet the registration requirements of the state they live in, or have private legal documentation that creates the partnership (this applies in states where domestic partnerships are not recognized). There are some criteria that must be met for the domestic partnership to be valid, such as:

  • Neither party is married to someone else.
  • The partners have the legal right to marry.
  • The partners are not related.
  • The partners are currently sharing a residence.

Basic property ownership rights for domestic partnerships

Property ownership rights related to domestic partnerships will vary based depending on the laws of the city and state where the couple lives. This includes the rights a partner has to property that was owned before and during the partnership.

In most cases, it’s in the best interest of couples joined in domestic partnerships to have a will that outlines how jointly owned property will be handled in the event of death. While some states will allow for the surviving domestic partner to automatically receive a percentage of interest in property, other states and cities specifically prohibit this inheritance unless it is documented in a legally binding will.

What you need to know about mortgages and domestic partnerships

On the surface, domestic partners go through the same mortgage pre-approval process as any other couple. Equal Credit Opportunity laws prohibit discrimination in lending based on race, color, religion, national origin, sex, marital status, or age.

Lenders look at income, credit and assets to determine whether domestic partners qualify for a mortgage. The biggest difference in the loan process relates to how domestic partners take title, and notifying the lender of that partnership to ensure the note and deed of trust are compliant with local state and city laws related to domestic partner property rights.

The agencies that provide funding, insurance and guarantees for mortgage lending include Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA) and the Veterans Administration (VA). Each of them have updated rules and guidelines related to how domestic partnerships are handled in the respective loan programs they offer, and some of the details are provided below.

Why this information is important to the lender

Besides wanting to confirm you have the ability to repay a mortgage, lenders want a clear path to collect on the debt in the event there is a default. That means they need to know the legal rights of anyone who is on title to the property.

The lender may need to modify or add addendums to a deed of trust involving domestic partners to protect their interest in the property and their ability to foreclose on the parties on title in the event of default or the death of one of the partners.

Because some states don’t recognize domestic partnerships, the death of one of the partners could trigger an acceleration clause — meaning the lender immediately calls the entire loan due, regardless of whether the surviving partner is on title to the property or not. This includes property that was owned prior to the formation of the domestic partnership.

Also, a domestic partnership may affect the way lenders look at debt in the event the relationship ends, and the partnership is dissolved. This is similar to how lenders treat a divorce, which may involve debts that were acquired before and during the relationship, and the division of those debts after the relationship is ended.

Fannie Mae and Freddie Mac domestic partnership guidelines

Fannie Mae and Freddie Mac are government sponsored enterprises that purchase mortgages to promote homeownership and a healthy market of products for consumers to get home loan financing. They purchased 44% of all newly issued mortgages through the second quarter of 2018.

Conventional lending guidelines define domestic partners as unrelated individuals who share, and intend to continue sharing a committed relationship with a borrower who signs the note. Because a domestic partnership can create legal obligations and responsibilities related to property ownership and how it is transferred between a couple, lenders have additional forms and documentation requirements to ensure the deed of trust complies with local laws.

Additional domestic partner information needed on a loan application

The standard uniform residential loan application only provides three marital status options: married, unmarried and separated. You’ll notice that in italics under unmarried, there is a long list of potential options which include single, divorced, widowed, civil union, domestic partnership and registered reciprocal beneficiary relationship.

For a domestic partnership, the correct box to mark is unmarried. However, to avoid jumping through hoops later in the mortgage process, the lender needs to be notified upfront if you are borrowing as domestic partners.

The biggest difference between unmarried couples and domestic partners when it comes to homeownership is domestic partners have more legal rights and responsibilities related to mortgages and homeownership. Domestic partners are required by law to sign legal documents indicating their ownership interest in a property and their obligations to a mortgage — unmarried couples don’t have any legal rights to property owned by their significant other.

Because of the legal ramifications of a domestic partnership, Fannie Mae created an addendum to the Uniform Residential Loan Application that requires both partners answer the following questions:

  • If you selected “Unmarried” in Section 1, is there a person who is not your legal spouse, but who currently has legal property rights similar to those of a regular spouse?

Domestic partners will answer yes to this question. The next section will request additional clarification.

  • If YES, please indicate the type of relationship and the State in which the relationship was formed.

You’ll have several options here, and you’ll want to check the domestic partnership box. If you forget to notify your lender about a domestic partnership, it could create delays prior to closing, when the lender finalize the vesting with the title company, and prepares the final closing documents.

FHA loan changes related to domestic partners

The FHA is a U.S. government agency that insures lenders who provide loans to homeowners. It is one of the most popular first time homebuyer loans, with lower minimum requirements than conventional loan programs offered by Fannie Mae and Freddie Mac.

Up until 2015, the FHA loan definition of a family member was limited to a loan applicant’s spouse, children, parents, grandparents, siblings, aunts and uncles. The definition was expanded to include domestic partners, which gives them full access to the many benefits of FHA financing.

The FHA allows flexibility to receive gifts of down payment and equity from family members, as well as allowing for family to help qualify as co-signers. Domestic partners can now qualify for some of the features reserved for family members under the prior definition.

Here are just a few of the benefits now available to domestic partners for FHA financing.

Gift funds for down payments

The FHA allows all of the funds for a down payment to be gifted by a family member. That means you can receive a gift from a relative of your domestic partner to purchase a home, or gift funds to your domestic partner.

Gift of equity to purchase a relative owned property

The FHA allows a family member to provide a gift of equity toward the purchase of a home that they currently own. That means that you could purchase a “family” home with no down payment required your own funds.

Cosigning on the loan

The FHA allows for a family member to co-borrow with an applicant on an FHA mortgage without having to live there. The co-signer can gift the down payment at the same time, giving mortgage applicants more options to purchase or refinance a home.

This gives domestic partners the benefits of income from either partner’s relatives to help qualify for a purchase.

VA loans and domestic partners

The VA loan program provides the easiest qualifying guidelines of any mortgage program offered. Active duty and military veteran borrowers can purchase a home with 0% down, and under more flexible qualifying income and credit score requirements than the FHA or conventional loan programs offer.

However, one of the major factors in how much of a down payment is required on a home loan is whether the veteran is qualifying for the loan with an unmarried co-signer. Although the recent changes to marriage law allow same-sex marriages to receive the same VA home loan benefits as opposite-sex marriages, that’s not the case for domestic partnerships.

The marriage guideline for VA

The amount of down payment a veteran makes on a VA loan depends on the amount of entitlement available based on a variety of factors including years of service, type of discharge, and branch of the military. One other factor that affects the down payment is whether the veteran is co-borrowing with a spouse or non-veteran.

Only a qualified veteran is allowed to use his or her eligibility to obtain a VA loan. A married veteran’s spouse gets the benefit of the veteran’s eligibility, and if the entitlement is high enough, no down payment is required. If the veteran is not married, and needs a significant other on the loan to qualify, the veteran’s entitlement is cut in half, and a down payment is required.

According to VA guidelines, the VA will only recognize relationships that are organized as marriages under state law. Since domestic partnerships are not considered marriages, VA financing may look at the down payment requirement as a veteran and non-spouse non-veteran co-borrowing transaction, which would require a down payment.

There may be exceptions available if you can prove that the domestic partnership meets the state’s common law marriage standards, but you’ll need to check with the VA lenders, or a regional VA office in your area.

5 ways to hold property as domestic partners

Regardless of which loan program you go with, you’ll first need to decide how you will own the partner as domestic partners. As real property increases in value, how you maintain ownership can determine whether you receive any proceeds from the sale of the property, or have any obligations to the debt.

There are primarily two ways that you can take ownership to a property — as a sole owner or as a co-owner. Some states allow for specific ownership options as domestic partners, and we’ll take at look at those vesting choices below.

Sole ownership

For married couples, the most common vesting (the way a title will be held) for an individual is married as his or her sole and separate property. This gives the person on title the benefits of ownership of the property, including the right to receive any proceeds from the sale of it, and makes them solely responsible for debts that are attached to it, like mortgages or property taxes.

California is one of the states that has a specific sole ownership title vesting designation for domestic partners registered with the state as “a registered domestic partners as his or her sole and separate property.” The partner who is not on title is required to waive all rights to the property with a recorded document called a disclaimer deed. Again, this vesting option is for California, and may not be applicable or enforceable in other states unless state law recognizes domestic partnerships.

Community property

This type of vesting gives husband and wife or registered domestic partners equal ownership in a property. That means that all decisions regarding the sale, or mortgage financing, have to be agreed to by both owners.

Community property gives each owner the right to transfer the interest in any way they want, which means if one partner dies, the other partners doesn’t receive the interest unless a separate written agreement like a will is in effect.

Community property with right of survivorship

This is essentially the same as community property, except the words right of survivorship grant the interest of a partner that dies automatically to the surviving partner without any additional legal measures.

Joint tenancy

Joint tenancy gives all parties equal ownership. The interest is not divided, which means if one party dies, it automatically goes to the surviving party.

The difference between this is and community property, is joint tenancy is mandated by the laws of the state, so one partner cannot will his or her interest to another party — it automatically goes to the surviving partner. In community property, each partner has the right to will interest to an heir or another party upon death.

Tenancy in common

Tenancy in common allows owners in a property to choose the amount of interest they want to have in a property. Unlike joint tenancy and community property, the interest does not have to be held equally, so the parties can split it out in whatever manner they collectively agree to.

This also means that any party on title can sell, will, or lease his interest to another party.

There is no specific designation available for domestic partners when it comes to tenancy in common, since it doesn’t usually apply to a domestic partnership, where committed partners are usually seeking equal interest in anything they acquire for the duration of their relationship.

Advantages of a domestic partnership in mortgage lending

There are a number of advantages to a domestic partnership when it comes to mortgage lending. Joint credit reports can be pulled, and a joint loan application can be filled out, which saves some time on the initial application.

There are also some other qualifying benefits to applying for a mortgage as domestic partners.

Additional mortgage interest tax benefits

Because a domestic partnership is not a marriage, the IRS treats the mortgage interest tax deduction on an individual, rather than joint basis. That means each each partner is entitled to the maximum interest deduction, rather than the deduction being applied to them as a married unit.

As of 2019, the maximum deduction allowed for mortgage interest is $750,000. For a married couple, that is the maximum allowed to be deducted for a qualified primary or secondary home, which is essentially $375,000 for each member of that couple.

As domestic partners, this amount is applied to each partner separately, meaning up to $1.5 million can be deducted between the two partners, effectively giving domestic partners a tax advantage over a married couple.

Disadvantages of domestic partnership when qualifying for a mortgage

There are some drawbacks to applying for mortgages as domestic partners, especially when it comes to qualifying in community property states. There are only nine community property states, and they follow the rule that all assets acquired during the marriage are considered community property.

With community property comes community debt, and that’s where domestic partnerships can add some qualifying challenges to the mortgage process.

Debt is treated the same as being married

Since domestic partnership are effectively legal agreements to a committed relationship, lenders apply that concept to how joint debt is treated. FHA loans and VA loans require that a spouse’s debt be included in qualifying for a loan, even if they are not on the loan.

One thing that many borrowers don’t learn until they apply for a mortgage is that even if they own property with no financing on it, the property taxes and insurance still have to be counted as liabilities. Some borrowers fail to disclose these properties, only to painfully learn later that there are number of quality assurance systems lenders employ to check for property ownership of both domestic partners.

Conventional loans make an exception, so if one partner has a lot of debt and poor credit, a conventional loan may the best, and sometimes the only way to get approved for mortgage financing.

Cohabitating couples avoid this problem by having the person with the stronger credit profile to apply on the loan.

Dissolving a domestic partnership may create qualifying problems

Like any long-term relationship, domestic partnerships can go bad, and decisions will then need to be made about what to do with assets and debt that were created during the relationship. This can get messy given that many states don’t recognize these partnerships, and may not provide clear guidance for property and debt disputes.

This can be problematic if one or both of the partners wants to take out a mortgage in the future, since there will be no divorce decree available to outline the division of property and responsibility for any outstanding debt. In this case, both partners may have to employ attorneys to draft an agreement that outlines the division of debt and assets.

It may be worthwhile consulting a family law attorney at the beginning of a domestic partnership to outline steps that should be followed if the partnership is ended. These agreements work like a prenuptial agreement in a marriage, and may be worth the effort to avoid costly and lengthy litigation.

Final words about domestic partnerships in mortgage lending

With the exception of VA loans, mortgage lenders look at domestic partnerships in the same way as married borrowers. There may be a bit more paperwork involved in the mortgage application, and you’ll need to make sure your interest in any jointly owned real estate is protected either by the laws of the state you live in, or by a separate legal agreement drawn up by a real estate attorney.

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Denny Ceizyk
Denny Ceizyk |

Denny Ceizyk is a writer at MagnifyMoney. You can email Denny here

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Source: https://www.magnifymoney.com/blog/mortgage/mortgages-for-domestic-partnerships/

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