Living with, let alone buying a home with, an unmarried partner or friend was nearly unheard of a generation ago. But now, co-buying is not only starting to be normalized. The number of co-buyers with different last names has grown by 771% since 2014, demonstrating that this unconventional way of buying a property is becoming more mainstream.
Buying a home with a friend or partner can make a lot of sense in many situations, but it also comes with special considerations that need to be taken into account before signing on the dotted line. Understanding the benefits and risks beforehand can help ensure the deal doesn't go south.
An enticing new way to buy a home
There are a lot of reasons co-buying is becoming a more popular way to purchase a home. Having two signers on a mortgage can help meet underwriting criteria for a loan that a single buyer may not meet and requires both parties to bring less to the table upfront. Maybe the couple hasn't formally married yet but intends to in the future and wants to build equity beforehand.
Given the current housing market, which is appreciating at record speed, co-buying could be an appealing way to enter the housing market despite increased prices and avoid having to continue renting. Rent has risen by as much as 25% in some metropolitan markets this year, making purchasing a home at incredibly low mortgage rates all the more appealing.
Co-buying isn't without risks
There are a lot of pros to this method of buying property, particularly in today's market. But co-buying isn't without significant risks that should be carefully weighed before buying.
Co-buying could mean you get less favorable terms because there is a co-signer that may not have as strong a credit history or other underwriting factors as you would individually. Debt-to income ratios can be skewed as well because the mortgage is shared between the two parties.
The benefits of co-buying include:
- More affordable entry point for the down payment from each party.
- Easier to qualify with multiple incomes, especially if one of you is on a 1099 or self-employed.
- Lower monthly payments when splitting the mortgage instead of shouldering the whole thing alone.
- All buyers can potentially save money on monthly expenses like utilities and minimize unexpected costs like repairs.
- Allows co-buyers to build equity rather than simply make a rent payment and results in leaving the occupancy with cash rather than lint in your pockets when it's time to sell.
- Tax deductions for mortgage interest can be split between the co-owning individuals at whatever percentage is agreed upon.
The risks of co-buying include:
- Interest rates are determined by whomever has the lower credit score, which could mean paying more than if you purchased alone.
- Impacts your debt-to-income ratio, since you are technically liable for the entire mortgage payment, which can hinder getting approved for other loans, like for a car.
- Both parties are tied to the same mortgage, so if one cannot or doesn't make payments. both people are held responsible, regardless of you making timely payments.
- Repairs or improvements will need to be agreed upon by both parties, which can be difficult if one person doesn't have adequate funds or motivation.
- Going separate ways takes more time than breaking a rental lease and will involve either selling or refinancing the house.
How to set yourself up for success
You need to go into this purchase with a realistic outlook that you will very likely go separate ways at some point in the future. Make sure that every aspect of the agreement is written out so that you both know what you are looking for and how to proceed in the event of a complication. Ideally, this would be done by entering a legally binding contract with the assistance of a lawyer so that you are protected if things take a turn for the worse.
Make sure to clearly spell out who pays how much for each bill associated with homeownership, what to do if one of you becomes unable to pay for a while, and what to do if one of you wants to leave. Also, do your own verifications on each other before even starting this process by checking credit scores, income, and other financial aspects.
Co-buying a home can be a great way to get out of the rental market sooner than you otherwise may have so that you can start building equity and not be at the whim of rent increases. But it comes with a fair amount of risk when entering into a partnership with someone. Making sure to check all of your bases prior to buying, creating a solid agreement between all parties, and having a backup plan just in case a disagreement or unexpected situation arises will keep both co-buyers safe.