With mortgage rates at near historic lows, purchasing a home is even more affordable. There’s a lot to consider, though, whether the property is going to be your primary residence or a rental. There’s even more to think about when purchasing with a friend. We outline the benefits and what home buyers need to think about before purchasing a home with another person.
Mortgage lenders have tightened standards for obtaining loans in recent years. Even if you have good credit, you still might not qualify for a loan on your own. If you decide to purchase a home with another person, the lender will take both parties’ incomes and credit scores into account, which can decrease your debt-to-income ratio and increase tangible assets. This means you might have a better chance of qualifying.
Splitting the Cost
You’ll likely share the mortgage payments, the closing costs, the down payment, and the utilities, maintenance and repair costs. Purchasing with another person will cut your expenses drastically, allowing you to get more for your money and possibly to do more renovations if you want to. Having another person help with the costs will minimize your risk and could make the whole process less daunting for you.
You receive all the benefits of purchasing a home but with less risk. This means you’ll be building equity, receiving the tax benefits of having a mortgage and putting your money toward an investment instead of renting. If one of you falls on hard times, the other can help pick up the slack. If unforeseen problems arise, you’ll have someone to help you out and assist with expenses.
Points to Think About
Mortgage Rates Depend on Both of You
Since both of you are trying to qualify together, you might have a better chance of getting a loan. However, the interest rate your mortgage company will give you will be based on two incomes, credit score and sets of assets.
This means someone else’s finances will influence the interest rate you get, which can make a big difference in your mortgage payments. They could have great credit and help you get a lower interest rate, or they might have a less than stellar portfolio, which might ultimately lead to a higher interest rate.
Your Credit Score Is in Their Hands
If both of your names are on the mortgage, then both of you are responsible for paying the bills. If your friend can’t pay their share of the mortgage or bills, you both still have an obligation to make the entire payment, so it’s your credit that’s on the line as well as theirs. On the flip side, if you’re unable to pay your bills, their credit will suffer, too. Either way, it’s a difficult situation, and your friendship could be strained.
When you’re renting, you can get out of your lease and move fairly easily. It’s a lot harder to get out of a mortgage. If you need to move for your job, decide to get married or no longer want to live with your friend, you’ll want to get your name off the mortgage, which is easier said than done.
In order to remove your name, you’ll need to either sell the house or refinance the loan under the other person’s name. Both are time consuming and costly. You might not be able to sell your home, and your friend might not be able to qualify for a refinance on their own. Like it or not, you might be stuck with your portion of the bill.
Make sure you discuss this possibility before you purchase. Determine what will happen if one of you can no longer live in the house. Make sure the person you’re purchasing with is someone you can trust and get along with. The home buying process might test your relationship, and you want to make sure you have the best possible chance of making the situation work out well.
Responsibilities Are Shared
This is true for renting as much as it is for buying, but make sure you’re both on the same page about responsibilities. Whether it’s the mortgage payments, utility bills, cleaning or lawn care, everyone needs to understand and agree to their part.
Owning a home is a very rewarding experience, but it requires maintenance and more money upfront than renting. Make sure you purchase with someone you trust who will pull their own weight and understand their part so you don’t end up arguing later.
Before You Buy
My parents always told me it’s rude to ask others about how much money they make. It’s probably even ruder to ask about their credit score. In this situation, though, one person’s finances will affect the other person’s, so asking questions, rude or not, is necessary.
Have a frank conversation about your financial history and your friend’s. Find out if they’ve missed bill payments or have any debt. These might be uncomfortable questions, but they need to be asked upfront.
Advice from Someone Who’s Been There
Murray Suid has purchased several homes over the years, including two with a friend from work. While he purchased them to use as rental properties, his advice is applicable to primary residences as well.
He suggests spelling out the rules and expectations. List out who pays which bill at what time and discuss any renovations either of you want to make upfront. Discuss what renovations you don’t plan on making, too, as disagreements can arise over changes you don’t want just as much as changes you do want.
Setting guidelines about noise, smoking, animals and guests is also important.
“Look for holes in your agreement because many troubles will start with things that you didn’t agree on,” Suid says.
Make Sure You’re Prepared
Purchasing with a friend affords you the benefits of homeownership while minimizing your risk and workload, although it can have downsides as well. Make sure you’re ready to purchase a home and that you’re teaming up with a person you can trust. Once you both agree on the division of responsibilities, write it down and make a contract. Then you can start the qualifying process and begin searching for your dream home!
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