source: Rocket Mortgage
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The most common examples of homeownership are based around a traditional nuclear family dynamic. People often think of buying a house as something to do with a significant other or on their own. But what about buying a house with a friend?
Can You Buy A House With A Friend?
Yes. There are many ways to have ownership interest in a property, and these include options that allow any number of people to partner when purchasing a home. As long as all the buyers can afford the mortgage, you and your friend – or friends – will be all clear to go in on a house together.
Pros And Cons Of Purchasing Property With Friends
Purchasing a house with friends has its pros and cons. While there are plenty of reasons why buying a house with the help of a friend or two is a great idea, it’s best to think carefully about the possible consequences and fallout of making such a big commitment. Here’s how the benefits and drawbacks shake out:
- You can boost your purchasing power. By pooling your resources, you’ll probably be able to afford a better house in a better area than you would if you tried to purchase it
- It’s easier to get a mortgage. The amount you can afford for a down payment will likely increase with your friend’s help, and it could be easier to meet credit score requirements if you have two or more mortgagees, since many lenders will average your ratings and look at combined income (assuming all parties have good credit). It’s also possible that you’ll qualify for better interest rates together than you would separately.
- No mortgage insurance. Splitting down payment costs means you’ll be more likely to afford at least 20% of your home cost upfront. If you can manage that, you won’t have to worry about private mortgage insurance (PMI).
- You can split costs. Home buying is daunting, especially if you’re just at the beginning of your career. Partnering with friends can obviously slash many first-time home-buyer expenses, including utilities, repair costs and mortgage payments.
- You can build equity together. If your only other option is renting, buying a home with a friend can be a great way to start building home equity rather than making monthly rental payments that don’t add value to an asset you own.
- It can help you get your first home or start investing. Sharing costs with someone else is how many people get their first home or get into real estate investing. Choosing a trusted friend or two to partner with can be a great way to get a head start when you’re early in your career.
- You can benefit from the company of a friend. While this is true for renting and roommates as well, you might be at a point in life where you’re ready to own a home or move to a new place but don’t want to do it alone.
- Every mortgagee’s credit score matters, which means your friend’s credit score can negatively affect your mortgage terms. Even if your score is high, your monthly payments could change significantly if your friend has credit problems before you purchase your home.
- Your friend can affect your credit score. Your mortgage payments are just one part of the problem. If your friend falls behind on their half of the mortgage payments, your credit score will suffer along with theirs, even if you’ve been on top of your share all along.
- It’s hard for one person to move out. Since you’re both on the mortgage, you'll need to go through a refinance to get the house under your name, and unless you’re in a good place financially, you might not be able to take on the burden of homeownership by yourself.
- It can be hard to work out the fine print. There’s a lot to think about when it comes to owning property, including how shares will be divided and how to handle survivorship and inheritance issues. These can be huge, heavy discussions to have.
- Your debt-to-income ratio (DTI) might suffer. Even though you split your mortgage payments with your friend, you and your friend are technically still responsible for the entire mortgage individually, which means your DTI will look a lot higher if you apply for other loans.
- Your relationship might suffer. If you decide to go in on a house with someone, chances are that you have a high level of respect and trust for that person. Even so, owning a home together can easily change a relationship, and new responsibilities and challenges might cause stress and disagreements. Before buying a house together, think about whether owning a home is worth the potential risk of damaging your friendship.
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How To Buy A House With A Friend
Need help getting started? Here’s what you’ll need to figure out and consider before getting into the standard home-buying process.
Choose Your Partner Wisely
Before anything else, your top priority needs to be making sure you have the right partner to purchase a house with. Sorting through priorities and motives when making such a big commitment can be overwhelming, but you’ll need to ask yourself – and your friend or friends – some frank questions before deciding to purchase together.Here are just a few to get started:
- Are you in a stable financial position?
- Can you make good decisions regarding your credit?
- Do we want the same things in a house?
- How long do you plan on living in the house?
- Do you have a stable job?
- Is either of us in or likely to enter into a long-term relationship?
Figure Out How To Split Ownership
Ownership terms are often expressed in a way that assumes a married partnership between homeowners, but if you’re buying a house with a friend, you might need to dig a bit deeper to understand how various forms of co-tenancy will function in your specific situation.There are two main types of ownership to consider:
- Joint tenancy: Joint tenancy gives each homeowner equal property shares, but it has some strict rules governing Right of Survivorship and financial responsibility.
- Tenancy in common: With tenancy in common, property shares can be divided equally or unequally between homeowners and be left to each individual’s heirs, rather than being passed to the remaining co-owners. Typically, however, passing property in this way will still require probate, which joint tenancy avoids.
Decide On Property Type
If you’re moving in with a friend, you might not be interested in a traditional single-family home, though this can be a great option if you’re on board with living closely together. Some other options to consider include various types of multifamily homes, like duplexes. You might even consider getting a larger home with three or four units if you want to live in and gain rental income from your home at the same time.
Divide Responsibilities Equally
A lot goes into owning a home. Having multiple people to split those responsibilities can be a huge help or a major hurdle, depending on how well you and your friend or friends communicate. Try to figure out upfront who will take care of which responsibilities and how you’ll divide up financial contributions when it comes to various utilities, repairs and other costs. It might even be beneficial to set up a home fund to make sure you’re contributing and have access to emergency funds needed for unexpected expenses.
Make A Plan For Moving Or Selling
Figuring out how to split up might feel like a bad start to owning a home together, but it’s important to have an idea of what you’ll do if something unexpected happens. Maybe you lose your job and need to move to find a new opportunity, or maybe your company needs to transfer you to another city. Perhaps your friend gets into a new relationship and wants to move in with their significant other, or maybe you need to move back home to support your family. Discuss how you’ll handle the situation if one of you has to leave. Will you sell or will you refinance as a single tenant? How will you split selling costs, profits and responsibilities? Regardless of what might cause it, you and your friend might need to break off your home partnership sooner than expected, and it’ll be a lot easier to handle if you have a plan in place ahead of time.
The Bottom Line: Think Carefully Before You Commit To Buying A Home With Friends
Buying a house with a friend or multiple friends might be a great way for you to achieve homeownership, but it’s not a decision you should make lightly. Before diving in, make sure you understand the financial and logistical hurdles you’ll face, as well as the human and emotional elements that might affect the purchase or, more importantly, your relationship. When all parties are ready, you can work with a co-buy lender from BuyJunto.com or a lender of your choice. With our process we include access to legal counsel to help you draft your co-buy agreement. to get started on your mortgage and review your home loan options together.