Not everyone can afford to buy a home on their own, especially if they’re managing student loan debt or don’t have a high salary. Fortunately, if you and a friend share the common goal of owning a home, there may be a path forward.
For good friends or cohabiting couples, buying a home together can help both parties boost their net worth or simply achieve homeownership.
However, purchasing a home together isn’t as simple as signing some paperwork and splitting the bills. The key to a successful co-homeownership arrangement is to set yourselves up for success from the get-go.
The content below is your guide to buying a house with a friend — the right way.
Is it a good idea to buy a house with a friend?
Before you get too excited about buying a home with your BFF, take the time to determine whether the decision makes sense for the both of you.
If either of you can’t afford or qualify to buy a house on your own, then it might make sense to buy with a friend, said Michael Becker, a branch manager with Sierra Pacific Mortgage in Lutherville, Md.
Getting started buying a home with a friend
First, you need to be clear on where you both stand financially. Do you each have a proven track record of paying your bills on time? Are you keeping balances low on your credit cards? Do you have steady employment and income?
You’re entitled to pull your credit report from each of the three credit reporting bureaus — Equifax, Experian and TransUnion — once every year at no cost to you. You’ll also need to have an idea of where your credit scores stand, preferably by taking advantage of a service that offers a free credit score.
Before you start house shopping, you’ll want to know how much house you and your friend can afford based on your combined creditworthiness and income. That’s where a mortgage preapproval comes in.
A preapproval is a letter from a mortgage lender that says you’re conditionally eligible to borrow money to purchase a home. You’re given an estimated loan amount and interest rate. Having this information not only helps you better understand what types of homes might fit in your price range, but also helps home sellers take you more seriously as prospective buyers.
Creating a co-ownership agreement
You’ll want to settle on a co-ownership agreement before you start the homebuying process. Make it plain and get in writing how you’ll split equity in the home, who will be responsible for maintenance costs and what will happen if there’s a major life event such as death, marriage or having children.
“It’s important to talk about it and what your plans are if the relationship breaks down,” Becker said. “If somebody dies, what do you want to do with the house?”
A real estate attorney can help you set up an official co-ownership agreement.
Questions every co-ownership agreement should answer
The co-ownership agreement you draft and sign will need to address the issues surrounding your joint homeownership. Here are the main questions the agreement should answer:
Q What happens if one of you wants out?
Your agreement should outline an exit plan in case one or both of you want out of the property. This can get extremely complicated. For example, what if one of the co-owners wants to be bought out by the other co-owners?
Let’s say you’ve got three people on a mortgage and on the title to a property. If the other two can come up with the money for the equity, you’ve solved that problem.
If you wanted to sell your interest in the property, however, the co-borrower would need to refinance the mortgage to remove your name from the paperwork. If they don’t refinance the loan and start missing mortgage payments, you’ll still be on the hook and your credit profile will be affected, even if you’ve moved on from that home.
Keep in mind that whomever refinances needs to qualify again for the mortgage. If you decided to buy a home together because you couldn’t originally qualify for or afford a mortgage on your own, you still might not qualify to own after a refinance, unless your financial circumstances have improved dramatically.
If you can’t refinance, you all may decide to arrange for the departing owner to rent out their living space in the household — then you’d need to take time to find a tenant.
Q What happens if one of you suffers a job loss?
You’ll want to be prepared to fulfill your financial obligations if someone loses their income. That’s why it’s recommended to create a shared emergency fund, which you can draw from if one of you runs into financial issues (or, of course, to handle any maintenance needs). You can establish the contributions and rules surrounding a shared emergency fund in your co-ownership agreement.
A good rule of thumb is to stash away three-to-six months’ worth of living expenses. If you each save that much individually, you can pool up to a year’s worth of expenses for a rainy day.
Q How will you split the bills?
The co-ownership agreement also needs to address how you all will split up housing costs. Should you put some of the bills in one person’s name and some in the other’s name? What about opening a joint account and contributing a set amount to it for monthly bill payments?
Don’t forget about maintenance, repairs and escrow payments. You’ll want to be prepared for increases in your property taxes and homeowners insurance, should they come.
Applying jointly for a mortgage
Once you’ve decided that you and your friend will apply for a mortgage together, there are several things to keep in mind about the mortgage application process.
Although you’ll be co-borrowers on the same loan, you’ll each fill out your own mortgage application, Becker said. All of your information will be listed separately, including information about your income and existing debts. Once your applications go through underwriting, your and your friend’s information will be merged.
Based on this information, your lender will make adjustments to the mortgage rate you’re quoted. The more money you and your friend can contribute as a down payment, the better your mortgage rate tends to be. Similarly, higher credit scores will put you in a better position to get a competitive rate.
Whose credit scores do lenders use?
A lender will consider both of your credit scores during the underwriting process, which means a person with a lower credit score could drag down your collective credit score, leading to a lower mortgage rate.
When you apply for a mortgage individually, your credit scores are pulled from the three credit reporting bureaus and the lender uses the middle credit score — the second highest score — to help determine your estimated mortgage rate. In the case of a joint mortgage application, the lender will pull all three scores for each applicant, take the two middle scores and use the lowest of the two.
Choosing the right homeownership structure
When you buy a home, you’ll get a title, which proves the property is yours. The paper the title is printed on is called a deed, and it explains how you, the co-owners, have agreed to share the title. The way the title is structured is important because it details what happens when one of the co-owners needs to part with the property.
The two most common ways to approach joint homeownership are tenants in common and joint tenants with rights of survivorship.
Tenants in common
Tenants in common (TIC), also referred to as tenancy in common, is the title structure most unrelated people use when buying a home. TIC outlines who owns what percentage of the property and allows each owner to control what happens if they pass away. For example, a co-owner can pass their share onto any beneficiaries in a will and their wishes will be honored.
The TIC allows co-owners to own unequal shares of the property (60/40, 75/25, etc.), which can come in handy if one owner will occupy a significant majority or minority of the shared home. For example, if two friends decide to buy a multifamily home, but one friend pays more because one friend’s space has much more square footage than the other friend’s space, they can split their shares of the home accordingly.
Pros of a TIC structure
- Ownership can be unevenly split. You can own as much or as little as you want of the property as long as the combined ownership adds up to 100%. So, if you’re putting up 60% of the down payment, you can work it out with the other co-owner(s) to own 60% of the property on the title.
- You don’t have to live there. You can own part of the property without living there. This is relevant for someone who simply wants to be a partial owner, but doesn’t want to live at the property.
- You get to decide what happens to your share after you pass away. The TIC allows you the flexibility to decide what happens to your interest in the property in the event you pass away. You can decide if it will go to the other co-owners or to an heir. Regardless, the decision is yours.
Cons of a TIC structure
- You could pay more housing costs compared to your friend if you have a larger ownership share. Because a TIC doesn’t require a 50/50 split, if you use more of the home’s square footage than your friend, you could shoulder a larger portion of the monthly mortgage payment and other bills.
- Co-owners can sell their interest without telling you. Co-owners in a TIC can sell their interest in the property at any time, without the permission of others in the agreement. However, if they are also on the mortgage loan, they are still on the hook to make payments.
Joint tenants with rights of survivorship
In a joint tenants with rights of survivorship (JTWROS) structure, you and your friend would have equal shares in the property — a 50/50 split. This title structure differs from the TIC in that in the case of one co-owner’s death, the deceased party’s shares will be automatically absorbed by the living co-owner. For this reason, this type of structure is more common among family members or unmarried couples looking to purchase a home together.
If you were buying a home with a family member instead of your friend and would like your relative to automatically absorb your share of the property in the event of your untimely death, you’d go with this option. Even if you have it written in your will to pass your interest to another beneficiary, that likely wouldn’t be honored.
A joint tenants agreement requires these four components:
- Unity of interest: Co-owners must all have equal ownership interest.
- Unity of time: Co-owners must all acquire the property at the same time.
- Unity of title: Co-owners must all have the same title on the home.
- Unity of possession: Co-owners must all have the same right to possess the entirety of the home.
Pros of a joint tenants structure
- Everyone owns an equal share in the property. There’s no arguing over shares if you go with a joint tenants’ arrangement, since it requires all co-owners to have an equal interest. So each co-owner has the same right to use, take loans out against or sell the property.
- No decisions to make if someone dies. There’s nothing for co-owners or family members to fight over after you pass away. Your ownership shares are automatically inherited by the other co-owners when you pass away, regardless of what might be written in a will.
Cons of a joint tenants structure
- Equal ownership. Equal ownership can be a con as much as it’s a pro. If you’re going to occupy more than 50% of the space, or put up more of the mortgage or down payment, you may want to own more than your equal share of the property. If that’s a concern, a TIC agreement is best.
- No outside beneficiaries. In the event of your death, your co-owning friend would receive your share of ownership in the home, which means you can’t grant your ownership share to an heir in your will.
Pros and cons of buying a house with a friend
Still not sure if you and your friend should buy a home together? Consider the following pros and cons before making your decision.
|Pros of joint homeownership||Cons of joint homeownership|
The bottom line
It sounds like a fun idea to own a home with a friend, but there are several considerations to work through before you get entangled in a contract that will impact you both financially and personally.
The biggest mistake you can make is letting feelings take over, Becker said. This applies to pre- and post-homeownership decisions.
“It should be very calm, cool, planned out, thought out,” he said. “Sometimes when those relationships end, people let their emotions get the best of them.”
Know (and get it in writing) where you each stand on taking title, paying bills, filing taxes and establishing a way out — should life change for either of you.