Should You Buy a House With a Friend in 2023?

Homeownership doesn't have to look a certain way.

2022 has been quite a year for the housing market. We started the year off with an average sale price of a home in the U.S standing at $514,100 in the first quarter (per the St. Louis Fed). Meanwhile, during the first week of Jan. 2022, the average rate for a 30-year fixed mortgage was 3.22%, according to Freddie Mac. Now as we near the end of the year, home prices are falling in many markets -- but that same mortgage will come in at an average interest rate of 6.95% as of this writing.

In short, it's still a difficult time to buy a home, and it might be nearly impossible if you don't have the purchasing power of a dual-income household. But what if you could team up with a friend and buy a home together? Read on for some things to consider.

Legal considerations

It likely goes without saying, but if you're seriously thinking about buying a home with someone, you're probably already very close. So we'll start by assuming your friendship is a strong one. For example, maybe you have a roommate you adore, and you already know you're capable of living together harmoniously, and of sharing costs and chores in a way that is fair and acceptable to all parties. But if you want to buy a house together, you'll need to decide if you want to be tenants in common or joint tenants.

Tenancy in common

According to FindLaw, there are two ways to approach buying a home with a friend. In this first type of shared ownership, the parties involved can have unequal shares in the property. If you're buying with a friend, maybe one of you will own 67% of the home while the other owns 33%.

The arrangement can be broken in one of a few ways:

• If one of the co-owners buys out the other
• If the house is sold and proceeds are split
• If a co-owner dies and their heir sells the deceased person's stake in the house

Tenancy in common is most often used for married couples buying property, since ownership rights easily pass down to heirs.

Joint tenancy

In this second form of co-homeownership, all of the co-owners involved will take on equal parts of the property at the same time and all will be on the deed. A joint tenancy arrangement can be broken if a co-owner decides to sell or transfer their share of the home to another person, in which case the agreement just becomes a tenancy in common.

What about an LLC?

You may wonder if you and your friend should form an LLC to buy a home together. A limited liability corporation is basically a business, and real estate investors often buy houses this way. But the Co-Buy Blog (which specializes in helping unmarried and unrelated people buy homes together) notes that it isn't necessary for a primary residence purchase. It will just cost time and money to create and mortgage lenders often won't extend a loan to one in this situation. Being part of an LLC could also eliminate some of the tax benefits of buying, such as the mortgage interest deduction.

Financial considerations

Once you've decided how to handle the legal factors for buying a home with a friend, you should have a serious talk about the money involved. Buying a house could be the most expensive purchase you ever make, so now is the time to lay your financial cards on the table, from debts and credit scores to income and savings. Your success will hinge on all these factors, as they'll influence how much money you and your friend can pool for a down payment, as well as the mortgage rate you'll qualify for.

Mortgage considerations

Speaking of mortgages, you'll also need to decide what kind of loan to pursue. You have options when it comes to mortgages, and while the 30-year fixed-rate loan is an American classic, maybe you and your friend want to pay less interest and get the house paid off sooner, and so you opt for a 15-year fixed mortgage. You can often get a better interest rate for the first few years of your mortgage if you get an adjustable-rate loan, also known as an ARM. If you or your friend is a veteran or active service member, you might qualify for a VA loan. Or if you're dreaming of buying in a rural area, look at USDA loans. Finally, if you're first-time buyers with less money to put down and credit that isn't great, an FHA loan could be right for you.

What to do first

If you decide to move forward with purchasing a home with a friend next year it's a good idea to consult with a real estate attorney, who can help you create a legal co-ownership agreement that will define everyone's property rights along with financial responsibilities and expectations. Think through all the angles and costs of homeownership along the way. For example, if you need a new roof, who will pay for it? And if you have to file a homeowners insurance claim, who picks up the tab for the deductible? Will you split these costs? Will you each contribute to a joint checking account to cover home expenses?

Buying a home may not get any cheaper in 2023, and if you're worried you'll have to manage it solo if you're not married or in a committed romantic partnership, you might consider buying with a friend. Just go into any co-ownership situation with your eyes wide open and make sure to protect your goals and your finances.