If One Party is At Risk of Default on Any Loan Obligations or Has Creditors After Them, You Should Protect the Home from Foreclosure
If you want to purchase a house with your significant other and one of you has bad credit, there are certain steps you should take to purchase the home and protect both party's interests. If you have already purchased a home with your significant other, and one of you subsequently develops bad credit, then there are specific things you can do to alleviate the risk of being foreclosed on.
When one person in a relationship has bad credit and is at risk of defaulting in the future then the two of you should work out alternative arrangements with respect to purchasing a home together.
In Ohio, no matter how you purchase property, if you purchase it with someone with bad credit - then that person's creditors could foreclose on the house. In these situations it is best to have just one party in the relationship purchase the home solely in their name and then have a contractual arrangement to divide up the equity in the house as it is earned.
If one party to a relationship has bad credit you are going to want to avoid the possibility of their creditors filing a lien on the house. One party's bad credit hinders a few aspects of the home buying process. First, it may be hard if not impossible for the party with bad credit to obtain a mortgage loan. Second, if that party has loans in default or they are at risk of not being able to pay off some obligations, then they could be sued and any real property that they owned would be at risk. So if you are married to someone with bad credit or you are in a relationship with someone with bad credit and you want to purchase a home together there are a few things you should do:
- See if the person in the relationship with the best credit has good enough credit to purchase the home on their own
- Only put that person's name on the deed, the mortgage, and the note
- Work out a payment for equity agreement (only for non-married couples)
The problem with leaving the partner who has bad credit off of the deed and mortgage note is that they will most likely be paying for half of the mortgage and splitting the costs of all the home repairs, but they might not have any legal way to recoup their costs if the relationship goes south. This means that the person with bad credit could be contributing to the equity of the house for all the years that the relationship is good, but when the relationship gets broken off they will also be broken off from recouping any of their investment in the property. This is not a problem for married couples because Ohio law requires that married couples support each other (in ways like paying the mortgage), and provides mechanisms in the law to make sure that in the instance of a divorce that all contributions and equity in the home that was created during the marriage is split equally on divorce. Furthermore, in Ohio, contracts are unenforceable between the parties of a marriage. This means that the law automatically provides for the dividing up of the homes equity in divorce cases, but not in cases where a unmarried couple breaks up.
Make a Contract Before Purchasing a Home as an Unmarried Couple
Before purchasing a home with your significant other, you should plan for the best but prepare for the worst. You should have a plan in place in case of a breakup on who will keep the house, whether you will sell the house, and how the equity is divided or the contributions to home repair compensated in case of a break up. A contract can be drawn up between non-married persons who are seeking to purchase a home together. The contract can be tailored to your unique circumstances and will get both you and your partner on the same page about things in case the worst case scenario happens and you break up. The break up will be much easier if both of you already know what is going to happen with respect to the home. A good home buying contract between non-married persons will provide for what party moves out in case of a break up (if only one party is on the deed - then that party would stay), the contract could provide that the home be sold in the instance of a break up, or the contract could provide how the contributions of the party who is moving out will be paid back.
When two people are paying the mortgage and contributing to home repairs, but only one person's name is on the deed, then you should create a way for the other person to receive some sort of compensation should the two of you break off the relationship. This contract could provide for a way of calculating payments made and treat them as a loan in the case of a break-up, which could be paid back over a number of years. The contract could provide a mechanism for having the house appraised after a break-up and then calculating a payoff amount to the party moving out based on the home's value. The contract could provide for selling the house and splitting the equity in a certain way in case of a break-up. There are an infinite number of ways a contract can be drawn up between unmarried couples purchasing a house, and truly it should be drawn up specifically for your unique circumstances. If you are planning on purchasing a home with your significant other, contact an attorney at Harris & Engler to have a contract drawn up specifically for your needs so that the two of you can purchase the home with confidence that everything will be provided for in case of a break up later on.
