Is Buying A House With A Friend A Good Idea?
When you think of buying a house, you probably imagine a couple, or an individual being handed the keys to the property. Buying a house isn’t a financial commitment reserved only for spouses or individuals, however – you can buy a house with a friend, too.
Let’s look at how buying a house with a friend is different from purchasing a home by yourself or with a spouse, some of the reasons you might consider buying a home with a friend and how to go about it, if you decide it’s the right choice for you.
Can You Buy A House With A Friend?
Whether it’s an investment property or a primary residence, yes, you can buy a house with a friend. There are many ways to share ownership of a home – if you wanted to, you could even purchase a home with an entire group of friends. As long as you and your friend(s) can agree on a way to share ownership of the home and can both qualify for and afford the mortgage, you can typically buy a house together.
In this article, the term “friend” refers to anyone you aren’t legally married to.
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How To Buy A House With A Friend
When buying a home with a friend, you’ll usually follow the same home buying process you’d go through if you bought a house by yourself or with a partner, for the most part. Before making the commitment, here are a few things you should know that might impact your decision.
1. Carefully Choose The Friend You Want To Buy With
A house is a big financial commitment, so when you choose a friend to buy a house with, you’ll want to make sure you choose wisely. Are you both aligned on your priorities? Do you fully trust this person? Are you both financially stable enough to make it work? You’ll be not only living with this person but also splitting mortgage payments, so it’s important to know that your friend can be relied on.
2. Have An Open Conversation About Finances
When choosing a friend to buy with, you should also be sure to have an open and honest conversation about your combined finances. As co-owners, you’ll likely both be responsible for mortgage payments – so you should both be mindful of the effect this investment could have on your savings, debt-to-income ratio (DTI) and credit score.
Your combined finances will also determine your mortgage loan rates, so knowing your friend’s credit history and any other important notes about their financial past that might impact your ability to qualify for low interest rates will be crucial.
A few things you might consider discussing include:
- Credit history
- Your combined income
- Any debt between the two of you
- Your down payment expectations
3. Decide What Type Of Property You Want To Buy
You’ll also want to make sure that you and your potential co-owner agree on what type of property you’d both like to buy. Consider your intentions for co-purchasing property. Is it to live together, pooling your resources to afford you more choices? If so, are you in agreement about where you want to live? Do you have a plan for what will happen if you decide you want to go your separate ways?
What happens if one of you becomes disabled or passes away? It’s unpleasant to think about, but you can also purchase disability or insurance policies upfront that guarantee payment in either of those unfortunate situations so that you can keep paying the mortgage.
Or is it a vacation property, and if it is, do you plan to schedule when each party can use it? Can one owner rent out their share of the property?
Do you intend to use the house as a primary residence or for investment purposes? Or both? With a residential mortgage, you can buy multiplex properties with up to four units. Would your friend be interested in living in one unit and renting out the others? Would you?
If you and your future co-owner have different plans in mind for the property you’ll be purchasing, it may not end well, so it’s better to make sure you’re both on the same page.
4. Discuss The Type Of Ownership You Will Choose
When buying a house with another person, there are several different ways to share ownership, and the ramifications of your choice are big. You’ll need to have some thorough and difficult discussions with your friend before choosing carefully.
Make sure you and your friend meet with a real estate attorney to fully understand what each type of property ownership means. Unmarried people buy homes together all the time, and an attorney experienced in these matters will be able to help you create plans for contingencies that you probably haven’t thought of and make it easier to decide what type of ownership is right for you.
With a joint tenancy, you and your friend own the home equally, completely and in equal shares. That’s the type of ownership married couples enjoy. Joint tenancy comes with rights of survivorship, which means that when one owner dies, the other owner automatically inherits their share. Joint tenants cannot sell their share in the home without the permission of their co-tenant.
If you and your friend plan to make the house your primary residence, this is likely the best type of ownership to choose. You most likely wouldn’t want your housemate to sell their share without your permission if you’re sharing the home completely.
Tenancy In Common
With a tenancy in common, friends can choose how much of the home they want to own, whether they can sell their share and how they want their share to be distributed should they pass away while they own the property.
What makes tenancies-in-common popular among friends is that it allows them to sell their share in the property and designate an heir. If the property is a vacation home, for example, and you structure the arrangement so that you alternate weekends, it would not necessarily be difficult to share it with a stranger should one of you sell.
5. Put It All In Writing
Even if you’re fully confident in your choice of home co-owner, it’s important to create a Cohabitation Property Agreement or similar legal agreement. Since you’re not married to the person you’re buying the home with and lack the typical spousal legal protections, you’ll need to go through an attorney to set this up.
The purpose of this legal agreement is to make sure you and your co-owner are on the same page about your expectations for each other and the property. This can include matters like a buyout agreement, a decision on who pays which utilities, who gets property or pets should one party have to leave, etc. You could simply decide these things with your co-owner, but the cohabitation agreement makes it legally binding to prevent future issues and disagreements.
If you’ve already purchased property with a friend without putting all your agreements in writing, you can still create one before the time comes to sell or bequeath your share of the home, though you can’t alter your ownership type easily at this point.
Why Is Buying A House Different For Friends Vs. Married Couples?
Married couples enjoy statutory legal protections that don’t extend to unmarried people, even if they have a familial relationship, like siblings or parent and child. There are laws in place that protect a surviving spouse from losing their home during their lifetime. A court can use marital property laws to divide property between spouses should they divorce.
However, those same statutory protections for spouses can easily be created between parties contractually. A lawyer can help you have some tough conversations and then craft binding cohabitation agreements that embody the intentions of the parties and remove uncertainty from the transaction.
How To Buy A House With A Group Of Friends
It’s also possible to purchase a home with an entire group of friends. Just like buying a house with one other person, there are multiple ways to share title and ownership among multiple people. Before looking into how to split ownership among multiple people, however, you should consider the risks of sharing such a large investment with multiple people.
While it may be easier to qualify for a home mortgage with the help of multiple people, it can also be a riskier venture because multiple people are involved and responsible for mortgage payments. If you buy a home with multiple co-owners, it is a good idea to make sure there are agreements in place, potentially legal, to document owner expectations and plans for the home’s future.
Should I Buy A House With A Friend?
Buying a home with a friend can be a great way to achieve homeownership if you’re struggling to do it on your own – but this method of buying a home has its share of drawbacks, too. Let’s go over a few of the pros and cons of buying a house with a friend to help you decide whether it may be a good choice for you.
In sunny times, the benefits of buying a home with friends can seem endless.
Just like having a roommate when renting a home or apartment, buying a house with a friend makes homeownership more affordable and accessible. With the help of a friend, you may be able to pool your financial resources to afford a nicer place than either of you could on your own.
That means that lenders will look at your combined income and both of your credit scores, so it might be easier to qualify for a mortgage with good interest rates with the help of a co-buyer. Moreover, by combining finances, you also will likely be able to make a larger down payment with a co-buyer as well.
If you are able to make a larger down payment and can put at least 20% down, you can also avoid paying for private mortgage insurance (PMI) on a conventional loan. This is an insurance that benefits lenders should you default on your mortgage before you reach a threshold of 20% of home equity.
Lower Individual Expenses
By splitting the costs of a home with a friend, you can essentially halve the expenses you would have to take care of if you bought the house by yourself. In addition to being responsible only for your share of your down payment, you can split things like closing costs and expenses of homeownership.
Share Responsibilities of Homeownership
Owning a home is more work than you think if you’ve never owned one before. Having someone to share the workload with can be a huge help.
On top of that, most properties do a lot more work these days than they used to. Vacation homes can also become investment property via short-term rental sites like Airbnb and Vrbo. This can be a great way to start investing more affordably and making some passive income on the side. But providing those services to short-term renters involves more work for homeowners.
Build Equity More Easily
If you've been renting, you know that you’ll never see your monthly rent payment again. It’s being used to build your landlord’s equity in their building. By buying a house with a friend instead, you can build home equity together and create actual value rather than just paying rent and getting nothing in return.
When clouds roll in, however, homeownership with friends can pose unique challenges.
One Person’s Credit Affects The Others
If one person in a pair of co-buyers has a poor credit score, it can create a drag on your combined financial condition. In addition to a friend’s credit history potentially impacting what kind of loan you can qualify for, your co-owner’s poor credit might impact yours as well. If they fall behind on payments, your credit will take a hit, too.
As much as you might want to live with a friend, buying a property is a serious financial decision, and you need to approach it as such. If your friend’s credit score makes it impossible for them to qualify for a loan, you may be better off buying the home on your own and just sharing it with your friend.
Difficult To Equally Share Responsibilities And Financial Obligations
Sharing a home with a friend is a big commitment. You should decide who’s going to be responsible for what and who pays for what, as well as how you’ll resolve differences along the way.
If you’ve never lived with your friend before, you’re also going to have to assess how likely they are to be a compatible roommate. Check out how they manage their current home. Are they messy? Do they smoke? Do they frequently entertain guests? Do they have a pet or plan to get one when they have a home of their own? Make sure you talk out even the smallest of issues before you buy.
Deciding who pays for what, how to divide shares of the home and how to handle potential inheritance issues in the future can be a challenge to work out.
Breaking Tenancy Agreements Can Be Hard
If you or your co-owner want to move out, the process is not as simple as breaking a lease in a rental situation. Since both your names are on the mortgage, you’ll likely have to refinance with just one of your names on the new loan – and that person will also have to be responsible for the financial burden of the home by themselves, which may not always be feasible.
Could Impact Your Debt-To-Income Ratio
Even if you split your mortgage payments with your co-owner, your debt-to-income (DTI) may look artificially high because you are both technically responsible for the entire loan. Be aware that this might affect your ability to qualify for other loans.
May Put A Strain On Your Friendship
You may have heard that it’s a bad idea to mix business with friendship, but that’s not always true. Still, it can be tricky when you’re both responsible for a mortgage. Our best advice is to think like a lender and consider your friend’s past behavior as strongly indicative of how they’ll behave in the future.
In other words, know that if they don’t pay their bills now, they’re unlikely to do so going forward, despite assurances you receive to the contrary. It doesn’t have to be a dealbreaker, but you’ll need to either have the income to cover all the expenses yourself or help your friend set up an automatic payment mechanism to make sure that bills get paid first.
Before buying a house with a friend, consider your relationship with that person and whether it can withstand these challenges.
The Bottom Line
Buying a home with a friend is a great way to make homeownership a more easily achievable goal for first-time home buyers and can also be a great way to get started investing in real estate. Being co-owners with a friend also comes with its fair share of risks, however, so make sure to consider all the potential downsides of such an arrangement before committing.
Are you and your friend ready to get started on buying a home together? Apply online now and start the approval process.