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A Guide to Understanding Bridge Loans

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Getting a bridge loan
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Buying a new home before you can sell your old one can present quite the financial conundrum. This is mostly because you have to come up with the cash for a new property when you don’t have access to the home equity you have already built up in your existing property. That’s where a bridge loan comes in.

What is a bridge loan?

Bridge loans promise to fill the gap or “provide a bridge” between your old residence and the one you hope to buy. They accomplish this by providing temporary financial assistance through short-term lending.

Unfortunately, bridge loans come with pitfalls, some of which can be costly or have long-term financial consequences. This guide will explain the good and the bad about bridge loans, how they work, and some alternative strategies.

How does a bridge loan work?

While bridge loans can come in different amounts and last for varying lengths of time, they are meant to be short-term tools. Generally speaking, bridge loans are temporary financing options intended to help real estate buyers secure initial funding that helps them transition from one property to the next.

Let’s say you found your dream home and need to buy it quickly, yet you haven’t had the time to prepare your current residence for sale, let alone sell it. A bridge loan would provide the short-term funding required to purchase the new home quickly, buying you time to get your current home ready for sale. Ideally, you would move into your new home, sell your old property, then pay off the loan.

Here are some additional details to consider with bridge loans:

  • Your current residence is used as collateral for the loan.
  • These loans may only be set up to last for a period of six to 12 months.
  • Interest rates are higher than those you can get for a traditional mortgage.
  • You need equity in your current home to qualify, usually at least 20 percent.

Also keep in mind that there are several ways to repay a bridge loan. You may be required to start making payments right away, or you may be able to wait several months. Make sure to read the terms and conditions of your loan so you know where your financial obligations begin and end.

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Risks of taking out a bridge loan

Taking out a temporary loan so you can purchase a new home may sound ideal, but as with most financial products, the devil is in the details. While these loans can help in a pinch if you aren’t able to purchase a property through other means, there are notable disadvantages.

They can cost more than alternatives

David Reiss, a professor at Brooklyn Law School and the academic program director at the Center for Urban Business Entrepreneurship, says the biggest downside of these loans is the price tag. Because bridge loans are meant to work for the short term, lenders have a much shorter timeline for turning a profit. As a result, “they typically charge a few percentage points higher than what you would pay with home equity loans,” says Reiss. Not only that, but they come with closing costs that may be expensive, and can vary from loan to loan.

So, even if the loan is short-term, it will likely cost you more than borrowing the money through a traditional mortgage by selling your existing home first, or through other means.

You’re taking on more debt

Another inherent risk with bridge loans: You’re simply borrowing more money. “The loan is secured by your home, so you have another mortgage,” Reiss says. “If you don’t make payments, then you could face late fees and financial turmoil.”

You can’t predict when you’ll sell your home

And if you’re unable to sell your home and your new or old monthly mortgage payments are taking a big chunk of your income, you could have trouble meeting all your financial obligations.

Reiss offers one other scenario in which a bridge loan could spell financial trouble: if the real estate market sours.

“You might assume you’ll sell your home easily, but that isn’t always the case,” says Reiss. “Unexpected events can screw up your plans to sell your home, so if you end up carrying multiple mortgages, you could potentially end up in trouble.”

According to Reiss, taking out a bridge loan could easily leave you with three home loans — your old mortgage, your loan, and your new mortgage — if the housing market slumps inexplicably and you can’t sell.

“This may not be a problem temporarily, but it can cause financial havoc in the long run,” he says. “You’ll be stuck with the unexpected expense of carrying all these mortgages.”

Falling behind on payments can lead to foreclosure on your old home, your new property, or both.

Advantages of a bridge loan

Applicants who are well aware of the risks of this financial product may still benefit from choosing this option. There are notable advantages, Reiss says, especially for certain types of buyers.

They can give you an edge in competitive markets

Bridge loans are “the kind of loan you get when you need to move forward and you can’t do it any other way,” says Reiss. If you are absolutely dead-set on purchasing a property and struggling to make the financials work, then a bridge loan could truly save the day.

This is especially true in housing markets where homes are moving quickly, Reiss notes, since a bridge loan allows you to buy a new home without a sales contingency in the new contract. What this means is, you’re able to write an offer on a new property without requiring the sale of your old home before you can buy.

This can be quite advantageous “in a hot market where sellers are getting lots of offers and you’re competing against other buyers who are paying in cash or making offers without a contingency,” Reiss says.

Bridge loans may be more convenient than the alternatives

Reiss also says that, while there are other loan options to consider for buying a new home, they aren’t always feasible in the heat of the moment. If you wanted to purchase a new home before selling your old home and needed cash, you could consider borrowing against your 401(k) or taking out a home equity loan, for example.

Yes, these options may be cheaper than getting a bridge loan, Reiss acknowledges. The problem is, they both take time. Borrowing money from your 401(k) may take several weeks and plenty of back and forth with your employer or human resources department, and home equity loans can take months. Not only that, but it might be difficult to qualify for a home equity loan if your home is for sale, Reiss says.

“A home equity lender who catches wind of your intent to sell your home may not even loan you the money since it’s fairly likely you’ll pay off the home equity loan quickly, meaning they won’t turn a profit,” he says.

Bridge loans, on the other hand, could be more convenient and timely because you may be able to get one through your new mortgage lender.

Four good reasons to take out a bridge loan

With the listed advantages and disadvantages above in mind, there are plenty of reasons buyers will take on the risk of a bridge loan and use it to transition into a new home. Reasons consumers commonly take out bridge loans include:

1. You want to make an offer on a new home without a sales contingency to improve your chances of securing a deal.

The most important reason to get a bridge loan is if you want to buy a property so much that you don’t mind the added costs or risk. These loans let you make an offer without promising to sell your old home first.

2. You need cash for a down payment without accessing your home equity right away.

A bridge loan can help you borrow the money you need for a down payment. Once you sell your old home, you can use the equity and profit from the sale to pay off your loan.

3. You want to avoid PMI, or private mortgage insurance.

If most of your cash is locked up as equity in your current home, you may not have enough money to put down 20 percent on your new home and avoid PMI, or private mortgage insurance. A bridge loan may help you put down 20 percent and avoid the need for this costly insurance product.

“But you would need to net out the costs of the bridge loan against the PMI savings to see if it is worth it,” says Reiss. “And remember, once you have sold the first home, you could use the equity from that home to pay down the mortgage on your new home and get out of paying PMI.”

According to the Consumer Financial Protection Bureau (CFPB), you may have to order an appraisal to show you have at least 20 percent equity to get PMI taken off your new loan, and even then, it can take several months.

“So, we might be talking about six to 12 months of avoided PMI payments if you were planning on using the equity from your old home to pay down the mortgage on your new home,” says Reiss.

4. You’re building a new home.

A bridge loan can help you pay the upfront costs of building a new home when you aren’t yet prepared to sell your old one because you still need a place to live.

How to qualify for a bridge mortgage loan

Because bridge loans are offered through mortgage lenders, typically in conjunction with a new mortgage, the requirements to qualify are similar to getting a new home loan.
While requirements can vary from lender to lender, you commonly need to meet the following criteria for a bridge loan:

  • Excellent credit
  • A low debt-to-income ratio
  • Significant home equity of 20 percent or more

Typically, lenders will approve bridge loans at the value of 80 percent of both the borrower’s current mortgage and the proposed mortgage they are aiming to attain. Let’s say you’re selling a home worth $300,000 with the goal of buying a new property worth $500,000. In this example, across both loans, you could only borrow 80 percent of the combined property values, or $640,000.

If you don’t have enough equity or cash to meet these requirements — or if your credit isn’t good enough — you may not qualify for a bridge loan, even if you want one.

Fees and other fine print

Before you take out a bridge loan, it’s important to understand all the costs involved. Here are some fees and fine print you should look for and understand:

Fees

Since bridge loans vary widely from lender to lender, the fees involved — and the costs of those fees — can vary significantly as well. Common fees to look for include an origination fee that can be equal to 1 percent or more of your loan value. You will also likely be on the hook for closing costs for your loan, although the amount of those costs can be all over the map based on the terms and conditions included in your loan’s fine print. As example, Third Federal Savings and Loan out of Cleveland, Ohio, offers a bridge loan product with no prepayment penalties or appraisal fees, but with a $595 fee for closing costs. Borrowers may also be on the hook for documentary stamp taxes or state taxes, if applicable. Make sure to check your loan’s terms and conditions.

Prepayment penalties

While it’s unlikely your loan will include any prepayment penalties, you should read the terms and conditions to make sure.

Payoff terms and conditions

Because all bridge loans work differently, you need to be sure when your loan comes due, or when you need to start making payments. You may need to make payments right away, or you might have a few months of wiggle room. Because there are no set guidelines, these terms can vary dramatically among different lenders.

Tips to sell your home quickly and avoid a bridge loan

If you’re on the fence about getting a bridge loan because you’re worried about short-term costs or the added layer of risk, try to sell your home quickly instead. If you’re able to sell, you may be able to access your home’s equity and avoid a bridge loan altogether, while also eliminating the possibility of getting “stuck” with more than one home.

We spoke to several real estate professionals to get their tips for selling your home quickly. Here are their best tips for getting your home ready to sell in a short amount of time:

Tip #1: Do some quick outdoor cleanup and landscaping work, then try to make your home as neutral as possible.

“To get people inside, they need to like the outside of your house,” says Nancy Brook, a Realtor who sells properties with RE/MAX of Billings, Mont. “Trim trees and shrubs, treat weeds, and mow and trim lawns.”

You should also make sure that there’s no chipped or peeling paint, she recommends. “And if your home is anything but a neutral color, you should seriously consider painting it.”

Tip #2: Get rid of half your stuff (or more).

As Brooks notes, most real estate agents suggest that sellers pack up most of their personal items and remove them from the house when they’re trying to sell. This helps people declutter while also making their property more appealing to people who might be turned off by someone else’s personal photos and items.

“Pack up or get rid of rid of paperwork, knick-knacks, personal photos and collections,” says Brooks. “Any furniture that obstructs a walkway should be eliminated. Get rid of any unnecessary dishes, pots, pans and small appliances in your kitchen. All the excess gives a junky appearance.”

Tip #3: Deep-clean from top to bottom.

While cleaning seems like an obvious first step, it is often neglected, notes Trina Larson, RE/MAX Realtor and selling specialist from Potomac, Md.

“You would never purchase a dirty car or a dirty new jacket,” she says. “Get everything as clean as possible, and try to make your house look brand-new.”

Items on your to-clean list should include corners, edges of baseboards, light fixtures, windows inside and out, your home’s siding and anything that isn’t in pristine condition.

Tip #4: Get rid of off-putting smells.

If you want to sell quickly, your house should smell clean and inviting, Larson suggests. “Your first step is to remove every offensive odor,” she says.

Go through each room and take inventory of what you smell. “Pet urine is especially heinous, and there is only way to remove it,” she says. “You have to go in and replace the carpet where the accident happened. Although it might seem like an expensive task, it is worth every penny. No cooking or animal odors.”

Basic cleaning can also help remove smells. The cleaner your home, the fresher it will seem to potential buyers.

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Bottom line: Is a bridge loan worth considering?

If you want to buy a home quickly and don’t have time to sell your home, a bridge loan could help. Likewise, bridge loans can be a good option for people who are moving or building a new home and need the capital to make the sale go through regardless of cost.

On the other hand, such loans may not be the best choice for consumers who don’t want to risk getting stuck with two homes and multiple payments. They’re also a poor choice for buyers who don’t want to pay any additional closing costs or interest payments to get in the home they want.

In the end, only you can decide if the risk of getting a bridge loan for your new home is an acceptable one.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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Holly Johnson is a writer at MagnifyMoney. You can email Holly here

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Guide to Reverse Mortgages: Is the Income Worth the Risk?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Although they have received increased attention in recent years, many consumers still have a hard time fully understanding what reverse mortgages are, how they work and who they benefit.

Continue reading for a thorough explanation on the above topics, plus a discussion of the advantages and disadvantages of this complex financial product.

What is a reverse mortgage?

A reverse mortgage is a loan that allows senior homeowners to borrow money against their home’s equity. Instead of making monthly payments to their mortgage lender, the homeowner receives money every month from their lender — or receives a larger amount in a lump sum. The balance owed to the lender grows over time and isn’t due until the homeowner moves out, sells the property or passes away.

Reverse mortgages are the opposite of a “forward,” or traditional, mortgage, which allows a borrower to purchase a home and repay their lender on a monthly basis. With traditional mortgages, the balance owed reduces over time until it’s completely paid off.

In both forward and reverse mortgages, the property is used as collateral for the loan. Only homeowners who are at least 62 years old can take out a reverse mortgage.

Reverse mortgage types

There are three types of reverse mortgages available to homeowners depending on their situation.

Home Equity Conversion Mortgage (HECM)

This is the most common reverse mortgage and is backed by the Federal Housing Administration (FHA). A HECM offers more flexibility in terms of how payments are disbursed to borrowers. Payment options include:

  • A single, lump-sum disbursement.
  • Fixed monthly advances over a specified period of time.
  • Fixed monthly advances as long as you live in your home.
  • A line of credit.
  • A combination of a credit line and monthly payments.

Single-purpose reverse mortgage

As the name suggests, this type of loan is used for a single purpose, such as covering home repairs or property taxes. Loan proceeds are typically distributed in a lump sum to cover the homeowner’s financial need. Single-purpose reverse mortgages are offered by nonprofit agencies and some local and state governments.

Proprietary reverse mortgage

This loan is offered by private lenders and usually benefits borrowers with high-value homes because they may receive bigger advances.

How a reverse mortgage works

A reverse mortgage is a loan that takes a portion of your equity and converts it into payments made to you. The money you receive is typically tax-free, according to the Federal Trade Commission. Unlike a traditional home equity loan, you are not required to pay back a reverse mortgage on a set schedule.

Let’s look at an example of how a reverse mortgage works:

John is retired, has paid off his mortgage and owns his home outright. He wants to stay in his home, but needs to supplement the monthly income he receives from Social Security and his pension.

The total amount John can borrow using a reverse mortgage is based on his age and that of his spouse, current mortgage rates and the home’s value; these limits are imposed by HUD. Here’s how the numbers could possibly work out for him, based on LendingTree’s reverse mortgage calculator:

Value of the home $300,000
Title holder’s age 70
Mortgage balance $0
Lump sum estimate $145,902

Based on the calculator, John might qualify for as much as $145,902 if he decides to go the single disbursement route. An advantage of getting a lump-sum payment from your lender is that the interest rate will be fixed, unlike the other options which have an adjustable interest rate.

The reverse mortgage loan limit is $726,525 for 2019, which is 150% of the conforming loan limit of $484,350 for forward mortgages. Still, even if the amount of equity you have is lower than the loan limit, you won’t be allowed to borrow the full amount.

The amount you’re allowed to borrow for a reverse mortgage is determined by the age of the youngest borrower, the home’s appraised value and the anticipated interest rate. Generally, the older you are, the more you can borrow.

Costs and fees

The most common fees associated with a reverse mortgage include:

  • A loan origination fee, which could cost up to 2% of the loan amount.
  • An initial mortgage insurance premium, which is a flat 2% fee.
  • An annual mortgage insurance premium, which is 0.5%.
  • Housing counseling, which usually costs about $125.

There are also additional closing costs and interest fees.

Reverse mortgage requirements

Senior homeowners who are interested in borrowing a reverse mortgage must meet the following requirements:

  • Be at least age 62 or older.
  • Own your home outright or have a small remaining mortgage balance. If you still have a loan, a good rule of thumb is to have at least 50% equity in your home, because you’ll first need to use the reverse mortgage funds to pay off the outstanding balance on your forward mortgage.
  • Must be seeking a loan backed by your primary residence.
  • Have no federal debt delinquencies, including student loans and taxes.
  • Proof of sufficient income to cover your property taxes, homeowners insurance and other housing-related expenses.
  • Demonstrate your creditworthiness as a potential borrower. While there isn’t a minimum credit score requirement, it helps your case to be responsible with your credit usage by maintaining on-time payments, keeping your balances low, etc.
  • Participate in an information session with a HUD-approved reverse mortgage counselor.

Most reverse mortgages have what’s called a “non-recourse feature,” which means if the lender takes legal action against you due to default, the lender can only use the home to satisfy the defaulted debt and can’t come after you for any difference between how much you owe and the home’s value. This also applies to your heirs in the event you pass away and the home is sold to repay the debt.

4 things to watch for when taking out a reverse mortgage

Just like all other financial products, a reverse mortgage comes with its share of risks, which typically include the following:

Higher financing costs

Compared with a forward mortgage, the fees associated with a reverse mortgage are more costly. As an example, a HECM lender can charge an origination fee equal to $2,500 or 2% of the first $200,000 of your home’s value, whichever is greater, plus another 1% for any home value amount above $200,000. The maximum allowable origination fee is $6,000. By contrast, the average origination fee for a traditional mortgage is just under $1,000, according to data from Value Penguin, a LendingTree company.

Increase in debt

You receive income from a reverse mortgage, but it’s still a loan that you or your estate will be responsible for repaying. Since you’re borrowing from your home’s available equity, your loan balance increases over time, which adds to your outstanding debt load.

No tax deductibility

The IRS treats the income received from reverse mortgages as loan advances, and for that reason any interest paid on a reverse mortgage isn’t tax-deductible.

Rising interest rates

The majority of reverse mortgage products have an adjustable interest rate, which is subject to market fluctuations. Your rate will be at a high risk of increasing very quickly.

Reverse mortgage pros and cons

Consider the following benefits and drawbacks before applying for a reverse mortgage:

Pros

  • Increase in your monthly income. If you opt for monthly payments from your lender, a reverse mortgage gives you additional income every month on top of any retirement income you already receive.
  • Flexibility to use the funds how you see fit. If you take out a HECM or proprietary reverse mortgage, there aren’t restrictions imposed on what the money is used for.
  • Ability to stay in your home. Not only do you get to keep your home, but you can keep it in your family after you pass away if your estate is able to fully repay the reverse mortgage.
  • Free from underwater mortgage stress. If your loan balance becomes greater than your home’s value, you likely won’t be on the hook for the difference between the two.

Cons

  • High upfront costs. There are origination fees, mortgage insurance expenses and closing costs in a reverse mortgage transaction. If you choose to cover these costs with your loan, you’ll receive a smaller payout.
  • Decrease in your home equity. With a reverse mortgage, your loan balance grows and your available equity shrinks over time.
  • Loan becomes due if you have a change of heart. If you decide you want to move out of or sell your home, the outstanding balance on your reverse mortgage becomes due immediately.
  • Adjustable-rate mortgage. Most reverse mortgages have adjustable interest rates that will likely increase over time. As of January 2019, the latest month for which data are available, reverse mortgage rates range from 3.583% to 7.019%, according to FHA statistics.

Shopping for a reverse mortgage

The first few steps you should take when you decide you want to apply for a reverse mortgage are to educate yourself on how reverse mortgage programs work, and to determine which loan type works best for your financial situation.

Once you have those details figured out, gather multiple quotes from reverse mortgage lenders and compare the costs and fees to find the best deal available. Ask questions about any and everything that seems unclear, and don’t forget to consult a HUD-approved reverse mortgage counselor for extra help.

Consider the interest rate each lender charges, as well as the origination fee and other closing costs. Additionally, work with each lender to determine how folding the financing costs into your loan will affect the amount you ultimately receive and whether it makes sense to pay those costs out-of-pocket instead.

After you’ve closed on a reverse mortgage and — for some unforeseen reason — decide you no longer need it, you have a “right to rescission,” which means you’re allowed to cancel the deal without penalty. You have a minimum of three business days after the loan closes to notify your lender in writing, and the lender has 20 days to refund any money you’ve paid toward the financing of that loan.

FAQs about reverse mortgages

The timeline varies by lender, but the lending process could take two months or longer. Be sure to ask your loan officer for a rough idea.

No, interest paid on reverse mortgage balances is not tax-deductible.

When you pass away, your reverse mortgage becomes due and payable. If you have a surviving spouse or heirs, they will be responsible for paying back the loan, which might involve selling your house.

For HECM loans, you can find an FHA-approved lender through HUD’s website. For other types of reverse mortgages, a quick online search will reveal public and private lenders in your area.

Reverse mortgage alternatives

A reverse mortgage isn’t the best option for every senior homeowner. If you need money to fund renovations, repairs or other expenses, here are some alternative options.

Borrow a home equity loan or line of credit

If you have a sizeable amount of equity in your home, you might qualify to take out a home equity loan or home equity line of credit (HELOC). You borrow a lump sum of cash with a home equity loan and you’re granted a line of credit, similar to a credit card, with a HELOC. Either of these products might work better if you’re still employed, as they require you to make monthly payments after borrowing the funds.

Refinance your existing mortgage

For those borrowers who still have a mortgage balance, you could refinance your loan by extending the term and lowering your monthly payment amount, which frees up some cash in your budget. You could take advantage of a cash-out refinance, which allows you to borrow a new mortgage that’s larger than what you actually need for your house and pocket the difference.

Rent out a room

Empty-nesters with more home space than they actually need might benefit from renting out one of their bedrooms either through short- or long-term rentals. This generates extra income that can be used for remodeling, traveling or other expenses.

Don’t forget your retirement accounts

As long as you’re old enough to tap your 401(k), IRA or other retirement account without any early withdrawal penalties, going this route is a less costly way to supplement your income. Generally speaking, you can withdraw from your retirement accounts without penalty starting at age 59 ½.

The bottom line

Reverse mortgages come with additional considerations that may not always be a concern for forward mortgages, but they may provide relief for some older homeowners who want to supplement their income and also age in place.

If you can comfortably manage your insurance, tax and other obligations related to homeownership, maintain your property and keep it in good condition, and are confident that your heirs will take care of your home after your passing, a reverse mortgage could work well for you.

This article contains links to LendingTree, our parent company.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Crissinda Ponder
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Crissinda Ponder is a writer at MagnifyMoney. You can email Crissinda here

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

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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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.

This article contains links to LendingTree, our parent company.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Denny Ceizyk
Denny Ceizyk |

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

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