Buying a home on your own is a huge financial undertaking, especially for first-time buyers. You'll need to come up with a down payment from your own savings and cover the ongoing costs of ownership, like property taxes, maintenance, and repairs, by yourself. If you're eager to buy a house but aren't sure you can swing it financially or logistically on your own, then you may be tempted to buy a home with a friend. Here, we'll discuss the pros and cons of owning property with a friend so you can determine whether it's the right choice for you.
How to buy a home with a friend
Buying real estate with a friend requires several steps. You'll need to make sure you're on the same page financially, create a co-ownership agreement, and apply for a mortgage jointly.
Getting on the same financial page
Before you agree to enter into a real estate arrangement with a friend, you'll need to make sure he or she is a viable financial partner. To that end, you should ask to see your friend's:
- Credit report
- Credit score
- Savings account balance
- Proof of income
- Current debts
Having this information will help you determine whether you've chosen the right person to partner up with. Of course, you should also be prepared to share this same information so that your friend is also comfortable to move forward. Incidentally, you'll need the above information to apply for a mortgage, so gathering it up front will save you some time later on.
You'll also need to determine how much you and your friend are comfortable spending on a home, how much in property taxes you're willing to sign up for, and what sort of maintenance you're willing to do. And you'll need to determine whether you'd rather buy a home in solid condition versus a fixer-upper.
Creating a co-ownership agreement
Before you actually buy a house with a friend, you'll need to create an ownership agreement that works for both of you. That agreement should cover the following:
- How much equity will each of you get in the home? Will you split its cost, mortgage payments, and equity down the middle?
- Who will be responsible for property taxes, homeowners insurance, maintenance, and repairs? Will you split those costs and responsibilities evenly?
- What will happen if one of you gets married or has children?
- What will happen if one of you decides you want to sell?
- What will happen if one of you loses your job and can't pay the bills for a while?
- Are you interested in renting out the home? If so, how will that work?
Clearly, these aren't easy questions to answer, so you may want to enlist the help of an attorney to help you create an agreement that's fair and enforceable in a co-ownership situation.
Applying for a mortgage loan jointly
When you apply for a mortgage on your own, a lender will only take your finances into account. When you apply with a friend, things work a little differently -- namely, your lender will take your individual and joint financial circumstances into consideration when determining how much you can borrow, and at what rate.
To determine whether you and your co-applicant are viable loan candidates, your lender will look at each of your:
- Credit scores, which speaks to how responsible a borrower you are
- Debt-to-income ratios, which measures your current outstanding monthly debts relative to your monthly income
- Proofs of income, which could be pay stubs or a letter from your employer confirming your employment status and salary
- Funds available for a down payment -- the more money you're able to put down, the more attractive a loan candidate you'll be
Choosing the right joint ownership structure
When you buy a home, it comes with a title. The purpose of the title is to prove that the property in question is yours. When you buy a house with a friend, you have a couple of options with regard to how that tile is structured.
Tenants in common
Under this arrangement, the title to your home outlines who owns what percentage of that property. This arrangement allows you and a friend to own different shares of that property -- for example, you might own 75% while your friend owns 25%.
With this arrangement, you get control over what happens to your home if you pass away -- you can decide to leave it to family members or your co-owner. Also, you and your friend can each borrow against your respective share of the home. An owner in a tenants-in-common arrangement can also sell his or her ownership stake in the home at any time without the other's consent.
Joint tenancy with rights of survivorship
Under this arrangement, you and a friend will split ownership of your home evenly down the middle -- you get a 50% ownership stake, and your friend gets 50%. In the event that you one of passes, the other owner automatically gets the deceased person's share of the home. As such, if you have family you'd rather leave your share to upon your passing, this may not be a great arrangement.
Benefits of buying a house with a friend
There are plenty of good reasons to buy property with a friend.
- It may be easier to qualify for a mortgage. When you apply for a mortgage solo, lenders can only take your own credit and income into account. When you apply with a friend, that lender will determine your eligibility based on your combined income and both of your credit scores. If you choose the right friend to partner up with it could increase your chances of snagging a home loan at a competitive rate.
- It'll be easier to make your down payment. When you buy a house with a friend, you can both contribute toward its purchase price. And the higher your down payment, the lower your ongoing mortgage payments will be.
- You'll have someone to split your homeownership costs with. Property taxes, insurance, maintenance, and repairs can get expensive. If you buy a home with a friend, you won't have to shoulder those expenses on your own.
- You'll have someone to split the grunt work with. Financially speaking, it's not always possible to outsource every task associated with maintaining a home. If you buy with a friend, you'll have someone to share in that load.
Drawbacks of buying a home with a friend
On the other hand, there are certain pitfalls you might encounter when you buy property with a friend.
- You won't get to call all of the shots. The benefit of owning property versus renting is not having to answer to a landlord. But if you own property with a friend, that person gets a say as to what goes on with that home, which could result in you having to compromise.
- Things could get tricky if one of you wants out. Ideally, you'll have a co-ownership agreement that dictates what happens when one of you can no longer afford the home you've bought jointly, or when one of you simply no longer wants to live there. But enforcing that agreement could damage an otherwise solid friendship.
- You may have a harder time qualifying for a mortgage. If your friend's credit score isn't as solid as yours, and he or she has a higher debt-to-income ratio than you do, you need to be careful. It could hurt your chances of getting a mortgage, or leave you with a less favorable rate than the one you'd qualify for on your own.
- You'll risk losing your home if your friend can't make his or her payments. You might enter into an arrangement wherein you and your friend agree to split your mortgage 50/50. But if your friend stops paying, your mortgage lender won't care that you're current on your half -- you'll need to come up with that entire mortgage payment every month or risk foreclosure. Along these lines, if you fall behind on your mortgage due to your friend's lack of responsibility, your payments will be listed as delinquent -- and that's something that could impact your credit score as much as your friend's, even though you're not the one to blame.
Should you buy a house with a friend?
Buying property with a friend can work out well, but it could also end up being a huge mistake. Weigh the pros and cons carefully before making your decision.
Better Returns - half the volatility. Join Mogul Today
Whether over the 21st century, the past 50 years... Or all the way back to more than 100 years... Real estate returns exceed stocks with SIGNIFICANTLY less volatility! In fact, since the early 1970's real estate has beat the stock market nearly 2:1.
That's why we launched Mogul, a breakthrough service designed to help you take advantage of this critical asset class. With volatility spiking, Mogul members have been receiving investing alerts with projected rates of return of 16.1%, 19.4%, even 23.9%, and cash yields of up to 12%! And these aren't in some 'moonshot' penny stocks or biotechs, but more stable multi-year real estate developments that don't see their value swing on a daily basis like the stock market.