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 a joint tenancy 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.