So you want to buy a home but can’t swing it on your own – at least not without going the tiny house route or buying in an area where you’d be scared to get the mail without a police escort. But what if you could pool resources with one or more friends and purchase together?
Sounds great on the surface, right? Communal meals and Netflix marathons and borrowing each other’s clothes (or weight belts, or whatever it is that guys borrow from each other). You get a path into homeownership, and you get to live with someone you like. What could go wrong?
A lot, actually. When buying a home with a friend, there’s a lot to consider.
Qualifying for the loan
The initial financial benefit to buying a home with a friend is being able to split the downpayment to make the home more affordable or buy more home by increasing your financial contribution. But qualifying for your mortgage will be dependent on each buyer’s credit report.
“Since you and your friend will both be on the mortgage, both of your credit reports will be used by the lender,” said Investopedia. “One person’s bad credit can negatively affect the mortgage terms, including the interest rate that you pay on the loan. Even a small change in interest rate — say 4.5% versus 4.0% — can make a big difference in the amount due every month on your mortgage and in the total interest you’ll pay over the life of the loan.”
One of the biggest challenges of buying a home with friends happens after the purchase: living together. Depending on the house you buy and the person you buy it with, you may have to give up some privacy, compromise on style, put up with more noise and guests than you may have expected, and endure a mess if one of your new housemates isn’t as neat and tidy as you. You know what they say: you never really know anyone until you’ve lived with them. Especially when it comes to a large financial commitment like a home purchase, compatibility is key.
Then again, you’ll presumably have help with cooking, cleaning, housework, and social planning. Will that make up for the ugly couch you have to see everyday in the living room, the dishes always clogging up your sink, and the hum of the TV she never turns off? Only you can say.
Dealing with finances
When you buy a home with another person, you’re dependent on them to do their part, financially and otherwise. That starts with the down payment and closing costs, but making sure your housemate is financially solvent enough to consistently make his or her share of the mortgage payments and other monthly obligations like insurance, HOA fee, utilities, and items like lawn service is key. Not to mention any necessary repairs that will have to be made down the line.
Making it legal
That’s why experts recommend consulting an attorney prior to purchasing to establish a contractual agreement that spells out the important details. That way you’ll have, in writing, things like: who holds the title, how the ownership percentages are split, the division of ongoing expenses, and what to do when one of you wants to move or sell.
“If you’re buying with friends or family, you’re going to want to lay down some ground rules. That’s where co-ownership agreements come in,” said Realtor.com. “These documents are the prenuptial agreements of homeownership – and they’re the only way to resolve ownership issues aside from court proceedings. When thousands of dollars are at stake, it’s important to address these concerns.”
Keep in mind that even though you are purchasing with another person, the legal burden for the home is not split 50-50; it’s on each person at 100%. So if the worst-case scenario becomes reality and one or more of your housemates fails to pay the mortgage, the responsibility will fall to you.
“You might be responsible and pay your half of the mortgage payment and utilities each month. Unfortunately, your roommate might not be,” said Money Crashers. “Your friend may initially pay on time, and likely has the best of intentions. But a job loss or huge medical bills can strike anyone at any time. And if your roommate is unprepared and can’t pay his or her share of the mortgage, it could affect your credit rating. Since both names are on the mortgage, you’re both responsible for payment, and the bank will report you as well as your roommate to credit agencies for non-payment or in the case of foreclosure.”
Changing lifestyles, and ending the arrangement
Buying a home with a friend may seem like a good idea of both are single and somewhat set in your careers, but what happens when one of you gets into a serious relationship, or accepts a job in another state, or wants to run off and join the Peace Corps? Common goals when buying a home are obviously critical, but life changes, sometimes unexpectedly. Deciding how you’ll handle changes that arise before you buy and making an exit plan if needed is an essential part of the contract – especially because extricating yourself from a mortgage is no easy feat.
“When you rent an apartment or house with a roommate, it’s fairly easy to walk away if the two of you no longer get along, or if you just decide to move. Not so with a mortgage,” said Investopedia. “Since both of your names are on the mortgage, you are both responsible for making the payments, even if one of you wants out of the deal. To get one of the names off the mortgage, you either have to sell the house or refinance the loan under just one name. Both options can be challenging: Selling can take many months, and there’s no guarantee the lender will approve your application to refinance. It’s a good idea to have a written agreement in place that details your agreed-upon exit plan should one of you decide to move on.”