For many married couples, your family home is your single-largest investment. A down payment alone can reflect years of hard work and savings. Yet, the choices you and your spouse make when buying your first home can affect you years later if you and your spouse face marital challenges, illness, or periods of financial instability.
And if you purchased a home before you were married, with your own hard work and savings, the stakes are even higher. The choices you make when you get married, and even after you are married, can lead to unintentional transmutation of your separate property into shared marital property. Yes, even if your name is the only one on the title.
Miscommunication about finances and the family home can lead to preventable conflict, which over years, erodes trust, resulting in growing resentment, that can eventually lead to divorce.
Many of the communication breakdowns we see could have been easily prevented had the couple sat down and had tough financial conversations before they got married or before they purchased a shared home. And many of the most complicated issues we see in divorce regarding division of property stem from some common mistakes couples make when they purchase their home, get married, or make repairs or improvements to the home during marriage.
Let’s look at the most serious real estate mistakes couples make:
Real Estate Mistakes Couples Make Before Marriage
- Failing to Have a Prenuptial Conversation About Who Owns Real Estate
- Failing to Get a Prenuptial Agreement When You Bring Real Estate into a Marriage
- Failing to Plan for How You’ll Save and Buy Your First Home Together
Real Estate Mistakes Couples Make When They Buy Their First Home Together
- Failing to Document Who Contributed What to the Down Payment
- Buying More House Than Either of You Can Afford
- Letting the Title Company Choose the Title Type for You
- Failing to Discuss Long-Term Plans
Real Estate Mistakes Couples Make During Divorce
- Not Being Realistic About What You Can Afford After Your Divorce
- Rushing into a Settlement
- Forgetting to Update Insurance
- Letting a Judge Decide What Happens to the Home
- Not Speaking to a Divorce Lawyer or Real Estate Agent
Failing to Have a Prenuptial Conversation About Who Owns the Real Estate
More couples are getting married when spouses are older. As a result, many couples go into marriage with more complex financial situations. If you are planning to get married, and already own real estate, the biggest mistake you can make is getting married without having an honest conversation with your future spouse about who owns the real estate.
Assumptions can lead to miscommunication and resentment.
And failing to get clarity early on can lead to mistakes that can transmute your separate home into marital property.
Imagine this scenario.
You bought the house years before you were married and consider it yours, but your spouse moves in after you get married and starts calling it ours. Next thing you know, you’re having fights about why you won’t put your spouse’s name on the title. Or, why you won’t refinance the home in both your names so that your spouse can launch her private practice or pay off her student loan debt.
Or, years down the line, you end up in medical debt after the birth of your first child and your spouse is wondering why you don’t just refinance the house to pay it off.
If you and your spouse will live in a home you’ve purchased, it behooves you to have a serious and honest conversation about who owns the home, and to take clear steps to protect the decision you make.
A simple conversation at the start of your marriage can prevent you from making the common mistakes that lead to the transmutation of separate real estate you worked hard to purchase into community marital property.
Failing to Get a Prenuptial Agreement When You Bring Real Estate into a Marriage
Clarity about your intentions allows you and your spouse to take legal steps to protect those intentions.
For example, if you choose to co-own a home you purchased before you were married, a prenuptial agreement lawyer can help you take steps to make this intention legal by including it in your prenuptial agreement. You can also take other formal steps, like putting both your names on the title, or refinancing the mortgage in both your names.
More often the spouse who purchased the home wants to keep the home in their own name and retain separate ownership. Yet, without legal clarity, in the form of a prenuptial agreement, it’s easier to make mistakes during your marriage that can lead to the transmutation of your separate real estate into marital property. For example, an innocent decision, like paying your separate mortgage from a shared marital account can result in your spouse potentially having a claim on home equity.
Without clarity about what’s separate and what’s shared, you open your marriage up to conflict and resentment down the line.
Despite the clear benefits of having a prenup, according to the Harris Poll, only 15% of married couples sign a prenup before they get married. This means that many couples go into their marriage without clarity about their separate real estate.
Failing to Plan for How You’ll Save and Buy Your First Home Together
Whether or not one spouse owns a home, most married couples eventually want to buy a home together.
If this is your goal, it’s a good idea to sit down before you get married and discuss how you’ll save for these goals. In Washington state, income earned during your marriage is considered shared property. Legally, each spouse is entitled to control 50% of the income earned during the marriage.
If your income is significantly higher than your spouse’s income, this could mean that your spouse may have legal control over a significant portion of your income. And if your spouse brings their own debts and liabilities into the marriage, this could potentially expose you to those liabilities.
Having a prenuptial conversation isn’t a plan for divorce. It’s a conversation that gives you clarity about how you’ll handle your money during your marriage, save up to take big steps together (like buying a house), and it gives you a chance to put in place legal protections to make these goals happen. Our Seattle, Tacoma, and Olympia prenuptial agreement attorneys at Truce® Law can help you take legal steps so that you can protect what you bring in, what you earn after, and set goals together.
Real Estate Mistakes Couples Make When They Buy Their First Home Together
Failing to Document Who Contributed What to the Down Payment
Saving up money for a down payment on a home is no small task. Couples might draw from diverse sources to make this happen. These sources can include:
- Shared Marital Savings
- Separate Savings
- Inheritance
- Gifts from Family
- Selling Property Owned Prior to Marriage
- Selling Separate Investments
- Selling Shared Investments
Where the money comes from matters.
If you sell a home you spent years prior to the marriage saving for and paying for, and use funds from the sale to fund a shared home without documenting this, your separate contribution to the shared family home purchase may not always be easily traceable as separate if you were to ever get divorced. The same goes for using inheritance to pay for a down payment on the home, taking gifts from family, or selling separate investments.
Document where the source of your down payment comes from and from whom. If you’re getting a mortgage, your loan officer will want to trace the source of funds for your down payment, so this is a great place to put it all in writing. If you’re buying a home in cash, it’s even more important to document the source of funds.
Tracing the source of your down payment is important because it can help you both better understand the share of equity each spouse owns going in.
A family lawyer can help.
Buying More House Than Either of You Can Afford
According to the FDIC, your monthly mortgage shouldn’t be more than 28% of your gross monthly income. And your total debt-to-income ratio, counting your mortgage, car loans, credit cards, and other debts, shouldn’t exceed 33% of your monthly gross income.
Families whose mortgages and debts exceed these figures are at greater risk of being “house poor.”
When families are “house poor,” a higher ratio of their gross income goes to paying the mortgage. This leaves you with less liquidity to pay for food, health insurance costs, and for savings.
Being “house poor” can lead to higher financial stress.
Families who are “house poor” are more at risk of having to turn to credit cards to make ends meet. They also might not have money to set aside for an emergency fund (experts recommend that families have 6 months’ worth of savings set aside for emergencies, like sudden unexpected job loss or illness).
This financial strain can have a long-term impact on quality of life, lead to less money saved for retirement, and put families at greater risk of foreclosure.
But there’s a hidden way you can be “house poor” without even realizing it, even if you and your spouse aren’t house poor right now.
If your mortgage is more than 28% of each spouse’s individual income, what happens if one of you unexpectedly becomes unemployed, faces sudden illness, or if you face marital strain or get divorced? If neither of you can afford the house on your own, you could quickly find yourself underwater or having to sell in an emergency.
When planning for home ownership, and even when shopping around, many couples consider their combined incomes.
Yet, if you can get by with a smaller home that could be paid for by only one spouse’s income, then you put yourselves in a far more financially secure position—one where you’re less likely to become house poor in the future.
Letting the Title Company Choose the Title Type for You
Your house title gives you legal ownership of a property.
Yet, what most people don’t know when they purchase their first home is that there are many ways to hold title.
Because Washington state is a community property state, when a married couple purchases a home, the state assumes that the property is community property, unless the couple takes steps to title the property differently.
What are other options?
Sole Ownership. From time to time, a married person will want to purchase property and keep it separate from community property. Consider the real estate investor who regularly performs 1031 exchanges, or the individual who just received a big inheritance from their family. In Washington state, inheritance is generally considered separate property, but it can be transmuted to shared or community property without careful accounting or titling.
In these cases, the title company will need to specify that the married person or domestic partner is receiving property as his or her “separate estate.” Moreover, the other spouse may also need to formally relinquish rights to the property. A family lawyer can also help formalize this by creating a postnuptial agreement that specifies that the real estate purchase is to be characterized as separate property.
Tenancy in Common. If you and your partner are drawing from separate sources to make your initial down payment, you may want to title your home as tenancy in common. With tenancy in common, you can choose what percentage of equity each spouse has. If one spouse contributes more for the down payment, they can own more of a fractional share of the home.
Failing to Discuss Long-Term Plans
Is this a starter home or a forever home? Do you plan to upgrade in the future when you have children? How will purchasing your home impact retirement plans?
For many families, the purchase of a first home is just one step in a larger plan. But if both spouses aren’t on the same page, problems can arise.
Real Estate Mistakes Couples Make During Divorce
Not Being Realistic About What You Can Afford After Your Divorce
Remember what we said earlier about being house poor? Without careful planning, many divorcing couples find themselves in a situation where neither spouse can afford to assume the mortgage on their own. This leaves the couple in the precarious position of having to sell the house.
A mistake individuals make in divorce is fighting for a home they cannot afford on their own. Before fighting to keep the house ask yourself these questions:
- Can I afford to refinance the mortgage in my own name with current interest rates?
- Can I afford to buy out my spouse’s share of equity? And if not, would I be able to refinance the mortgage for the value of the home as it is appraised today?
- Have I considered other costs, like insurance, repairs, and other ownership costs, and can I afford these?
Sometimes it doesn’t make financial sense for either spouse to fight to keep the house in divorce. In some circumstances, both parties might end up better off selling the home and splitting the proceeds.
If you aren’t sure about what you can afford, a Certified Divorce Lending Professional® may be able to help. Collaborative lawyers often work with CDLP’s serving as financial neutrals to help couples meet their goals, and in contested divorce, CDLP’s can advise individual clients about the divorce settlement they should seek to be able to meet their goals.
Rushing into a Settlement
Being married can feel like holding your breath for ten years. By the time you decide to come up for air, you’re desperate to get out.
But rushing into a settlement without carefully considering your finances, your home, and your future is a mistake.
We’ve seen situations where a spouse rushes to settle, giving their former partner more than their fair share out of guilt. And we’ve seen situations where someone offers up the whole house because they just want the marriage to be over. In some situations, the spouse giving up the property doesn’t always know what they are entitled to receive.
Yet, the decisions you make regarding your home and finances can impact you for years to come, and once you’ve finalized your divorce—there’s no going back.
Before you sign anything, speak to a divorce lawyer in Seattle, Tacoma, and Olympia. Take a beat. We know you want to get this done, but rushing is a mistake.
Forgetting to Update Insurance
If one spouse assumes the mortgage, or one spouse sells the house to the other, it’s important to check that your home insurance documents are updated to reflect changes in ownership. The consequences of missing this detail can be immense.
In a recent case in Florida, a home insurance claim was denied because the insurance policy wasn’t updated to reflect the home’s changed ownership after divorce (see Morgan v. American Security Insurance Company).
Letting a Judge Decide What Happens to the Home
When a couple can’t negotiate a divorce settlement, their divorce case can end up going before a judge.
When you leave a judge to decide what happens to the house, you surrender a great deal of control—control over how your home might be appraised, valued, or even sold.
In our attorneys’ experience, we’ve seen judges force sales, set deadlines by which the house must be sold (even if it’s during a downturn and both parties have to sell at a loss), and set deadlines by which the house must be in contract.
The way your home is valued can also vary from county to county. In some counties, judges require that the home be formally appraised, while in others, the judge might just pull numbers from real estate websites.
Letting a judge decide what happens to your house means putting your financial future in the hands of a stranger who doesn’t know you or your goals. Judges aren’t licensed real estate agents nor are they professional appraisers. Nevertheless, they can often make decisions regarding real estate sales and valuations.
That’s exactly what we work to prevent, helping you negotiate what happens to the house before it gets to a judge, using mediation and negotiation.
Not Speaking to a Divorce Lawyer or Real Estate Agent
If you do have to sell your family home because of divorce, the biggest mistake you could make is failing to speak to a divorce lawyer or real estate agent.
The Seattle, Tacoma, and Olympia divorce lawyers at Truce Law can help you and your spouse decide what happens to the house in a manner that is fair and reasonable.
And a licensed real estate agent can help you sell your home at a fair market value. If you are a couple thinking of buying a first home, a real estate agent can help you think about titling in a way that will protect you individually and in the future.
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This article is for educational purposes only and does not constitute legal advice. Every situation is unique. For guidance specific to your circumstances, consult a licensed family law attorney in your area.