Buying A House With A Friend: A Guide To Legal And Practical Considerations
Katie Ziraldo9-Minute Read
January 14, 2022
If you’d like to purchase property but can’t get the numbers to make sense, buying a home with a friend can be an advantageous solution. But before you start phoning your friends to find the perfect co-owner, learn about the benefits and drawbacks of co-buying a house, so you can determine if it’s the right move for you.
Although there can be risks involved, Americans are beginning to view co-ownership as a viable option. “Public data suggests that 3% – 7% of all home purchases involve friends buying together. Today, there is a compelling rationale for doing so,” says Pam Hughes, co-founder of CoBuy, a fintech startup that helps friends, families and loved ones pool resources to buy and own homes together.
Can You Get A Mortgage With A Friend?
You can get a mortgage with a friend. In fact, those who choose to buy a house with a friend often do so because it makes it easier to qualify for a loan. Lenders use a borrower’s debt-to-income ratio, which calculates the percentage of their monthly income that goes toward paying off debts, and FICO® Score to determine if they’re eligible.
When co-borrowing, you and your friend can combine your income and debts to improve your debt-to-income ratio (DTI). However, regardless of your DTI, you’ll both need to have a decent credit score. The reason is that the lender will review each of your credit reports and use the lowest median credit score to determine if you and your friend qualify for a mortgage. So, while you can get a mortgage with a friend, you must ensure that your friend’s financial standing is strong enough not to diminish yours.
How To Buy A House With A Friend
This process is different for friends or even an unmarried couple than it is for a married couple. Co-ownership can be structured as either tenancy in common or joint tenancy.
Tenancy In Common
When friends hold a house title as tenants in common, they each possess interest in the property. This interest can be divided equally or unequally. For example, let’s pretend you purchased a property with two friends. You own 50% of the property, while each of your friends owns 25%. Despite the difference in percentage owned, you would all have a claim on the property – meaning no individual can claim ownership over it.
By holding this type of title, you can sell or transfer your share in the real estate property to another person at any time without needing to receive your co-owner’s approval. While this may give you flexibility if your circumstances change, it can also leave you vulnerable. If a co-owner passes away, their interest is passed to their heirs, giving them the same control over the property.
When friends hold a title as joint tenants, co-owners must all gain ownership through the same deed at the same time, and they must all hold an equal amount of interest in the property.
This type of ownership structure includes the Right of Survivorship, which means that, in the event of a co-owner’s death, their share of ownership automatically passes to the surviving co-owner. Therefore, a co-owner’s interest cannot be inherited by an heir.
Although a co-owner’s interest cannot be passed down to heirs, a co-owner can transfer their interest to another individual. However, if interest is transferred to another, that individual may not enter into the joint tenancy. Instead, the individual would be entered into a tenancy in common ownership structure with the remaining co-owner, terminating the joint tenancy.
Unlike tenancy in common, any share in the real estate property cannot be sold without the consent of all co-owners, which can protect you if your friend wants to sell, and you don’t. However, if you’re the one who wishes to sell, this ownership structure could ultimately leave you at a disadvantage.
To determine which type of title is appropriate for your circumstances, you should speak to a professional. “A real estate attorney, a title professional or someone who has the full context of the group members’ relationships, their financials and their goals and objectives, as they relate to your property, should be consulted for guidance,” says Hughes.
Joint Tenancy Vs. Tenancy In Common: A Quick Comparison
Tenancy in Common
Each owner holds an equal amount
of interest in the property, which is split
Interest in property can be divided equally or unequally.
In the event of a co-owner’s death, share
of ownership is passed to the surviving
In the event of a co-owner’s death, share of ownership is passed to their heirs.
The share in the property cannot be sold without the consent of all co-owners.
The share in the property can be sold or transferred at any time without needing co-owner’s approval.
The Benefits Of Buying Property With Friends
Buying a home with a friend is a serious undertaking. However, whether you’re interested in purchasing a primary residence, an investment property or even a second home, co-ownership can come with certain advantages.
1. Having A Better Chance Of Being Approved For A Mortgage
Between saving for a down payment and paying off personal debt, some individuals have found it difficult to obtain a mortgage on their own. However, by combining your income (and debts) with your friend, you have a better chance of not only being approved for a mortgage but also obtaining better terms, including a lower interest rate.
2. Getting To Split Costs
Although getting a mortgage will help you buy your dream house, you still need to bring some cash for the down payment, utility bills, monthly mortgage payments and necessary repairs. Some potential home buyers have neither a large enough savings nor a high enough salary to afford all the costs associated with homeownership.
However, when friends buy a home together, they can split all these costs 50-50, making homeownership far more affordable. By splitting costs, friends can also purchase homes that are of better value, condition and even in a more convenient location.
3. Entering The Housing Market Sooner
By deciding to purchase property with a friend, you can combine your assets and become a home buyer earlier in life than you might have otherwise.
Why would individuals want to enter the housing market sooner? “They decide that they are tired of paying someone else’s mortgage,” says Hughes. “Their rents are high, and their mortgage payments may be comparable while providing the benefits of ownership.”
4. Eliminating Housing Uncertainty (If Buying A Primary Residence)
For renters, there can be a lot of uncertainty around housing. Often, renters have no idea how long they’ll be able to maintain their current housing arrangements because they’re dependent on their landlords. If their landlords decide to sell the property, they’re often forced to move. If their landlords increase the rent, they must pay more or find a new place.
“They don’t want to be at the mercy of a landlord’s rent increases or decision to sell a property,” says Hughes. When purchasing a primary residence, co-ownership offers individuals more control over their housing situation. Unlike rents, which increase continually, mortgage payments remain consistent over the lifespan of the loan. Knowing that your housing costs won’t increase over time provides co-owners with peace of mind and makes pooling funds far more enticing.
5. Gaining Passive Income (If Buying An Investment Property)
Nowadays, people talk about making your money work for you. However, without a certain amount of savings, it can be difficult to invest in ventures that enable you to do so. If you buy an investment property with a friend, you’ll both benefit from the ability to use the rent to pay off your mortgage and ultimately gain passive income.
“In this situation, the opportunity to rent a property long term and be cash flow positive is appealing,” says Hughes. “Passive income is a great way to build a nest egg and learn the benefits of making your money work hard, so you don’t have to.”
The Drawbacks Of Buying Property With Friends
Most of the issues with co-ownership revolve around the risks involved. There may be a number of enticing reasons to buy a home with a friend; however, the drawbacks can be far more severe.
1. Life Changes Disrupting Your Arrangement
Purchasing a home always involves some element of risk, but when you’re doing so with a friend, there’s far more outside of your control. You may be sure that you’ll be able to keep up with your portion of the monthly mortgage payments, but can you say the same for your friend? Even if your friend intends to make timely payments, there’s always the chance that a major life change could get in the way.
Losing a job or facing a medical emergency could create a huge financial setback, making it difficult or impossible to pay back the money you’ve borrowed. If your friend is unable to keep up with your monthly mortgage payments, you’ll be on the hook.
Also keep in mind that a mortgage is a 15- to 30-year commitment, and it’s likely that your lifestyle will be different well before your mortgage comes to term. If your friend decides to get married or take a job elsewhere, you may not be able to afford to maintain the home independently.
2. Challenges Qualifying For Another Loan
When you buy a house, your DTI increases since you’re taking on more debt without necessarily increasing your income. When co-buying, you and your friend will be “joint and severally liable” to pay back your loan. That means that you’re responsible both as a pair and as individuals. Therefore, when it comes to your DTI, a lender will view your debts as including the entire balance of the loan even though you’re technically splitting the costs with your friend.
If you decide you want to purchase a car or a second home in the future, you may have a difficult time obtaining another loan. Remember, lenders look for DTIs below 50%. So, unless you’ve increased your income since obtaining the mortgage to purchase the home with your friend, your DTI could be too high to qualify.
How To Make Buying A House With A Friend Go More Smoothly
If you’re ready to move forward with buying a house with a friend, it’s important to think about the long-term impacts of your decision and make sure you are both on the same page.
Look Into A ‘Fractional Loan’
If you are purchasing a unit as part of a Tenancy in Common, or TIC, you may be able to secure a fractional loan for your unit. This reduces your risk because you’re not responsible for your co-owner’s loan. But interest rates are usually higher for a fractional loan, and they are only offered in certain geographical locations where multi-unit TICs are common.
Co-ownership means entering into a legal contract and sharing major financial obligations. “Too much weight is given to the co-buy agreement, which is the legal document that codifies an ownership scenario,” says Hughes. “The real ‘meat’ of the pre-work is in the planning and consensus-building. Without attention to this important step, friends risk their financial investment in their property, the property itself and their relationships.”
If you’re considering co-ownership, you need to feel comfortable speaking to your friend about money, especially since you’ll most likely be splitting various expenses like maintenance, utilities, insurance, etc. Financial conversations can be awkward, but you’ll have to learn the ins and outs of your friend’s financial circumstances. Be prepared to ask your friend how much they make each month, how much they have in savings and how much debt they’re carrying. You also have to feel at ease sharing the same information about your own financial circumstances. If there’s anything questionable about your friend’s finances – perhaps high debts, a lack of savings or a tendency to overspend – it’s not a good idea to buy a house together.
Clarify Your Goals And Make Sure They Align With Your Choices
While some people cringe at the thought of mixing friends and finances, there’s no way to properly determine whether it’s a good idea to buy a house with a friend without knowledge of the circumstances. Consider why you want to co-buy a home.
Is it to gain a primary residence that you can both build home equity in instead of losing money to rent? If so, you’ll want to make sure that you and your friend are suited to not just invest together but also live together. Or, are you looking to co-own an investment property in order to make passive income? If revenue is your primary motivation, make sure that your friend is a responsible business partner, who is both shrewd and financially capable.
Develop An Exit Strategy
Even successful co-ownership arrangements usually come to an end. This may be a planned sale or an unexpected event – a lost job, a medical issue or a marriage – that forces one person to sell. If you have considered how you will handle these possibilities ahead of time, it will make for a much smoother transition – especially if you have all of the co-ownership arrangements in writing. Generally, if one partner wants out, you have three options:
- You can buy out your partner, which will require significant savings.
- You can sell their share to a new co-owner (which may mean sharing your house or property with a stranger).
- Both of you sell together and share the proceeds, which will require equity in the property.
The Bottom Line
If you’re thinking about buying a property with a friend, it’s important to consider your friend’s financial background, clarify your goals and decide if joint tenancy or tenancy in common will work for your specific situation.
If you’d like to find out more about your financial options, create an account with Rocket Mortgage®.
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