Remember building a fort under the table with your best friend? You spent hours playing there and pretending it was your house.
Maybe you had a dollhouse and turned it into a dream home for your dolls and stuffed animals.
Everyone dreams of owning a home but getting the keys isn’t always easy. Home prices keep rising along with the cost of living. People often discover they can’t afford a downpayment or a mortgage on their own.
But a friend can save the day! Co-ownership is growing in popularity and making home ownership possible even for those on limited budgets and resources.
We’ve put together 9 things you should consider before buying a house with a friend. Continue reading and who knows, you might decide it’s a great move!
1. Why Consider Buying a House with a Friend?
Consider first which age group makes up 34% of the current housing market. It’s the Millennials, people born between 1981 and 1996.
Millennials, especially those in the 25-24 age group, also carry more debt than other homebuyers.
All prospective homebuyers face the debt-to-income ratio challenge unless they can pay cash. Debt-to-income ratio is one test lender use when they determine whether you’re a good candidate for a home loan.
Home ownership may be the American dream but it’s not easily attained by every dreamer. With the near-crippling level of student loan, credit card, and auto loan debt, qualification for a mortgage isn’t impossible, but lenders don’t make it easy either.
That’s where the power of friends comes in handy.
In some markets, the dream of homeownership is so remote people share the rent, often well into their 30s. Why not pool your resources and your good credit? Investing in a home with a friend allows both access to the dream.
Before you start shopping for your new home, it’s a good idea if you and your buying partner know your numbers.
2. Have You Checked Your Credit?
Drooling over the most popular homes on your mobile real estate app gives you an idea of what kind of home you like. Getting inside one of those homes means going through a gatekeeper.
Most realtors today want a pre-qualification before they spend time showing you houses. A pre-qualification may include a soft pull on your credit.
Pre-qualification means you provide preliminary information to a lender. The lender uses income, debts, assets, and credit and estimates the loan amount they will likely approve.
Checking your credit before pre-qualification is a good idea—for both borrowers.
You and your friend will both be on the mortgage and the lender will use both of your credit reports. Credit plays a huge part in determining the terms of a home loan, especially the interest rate.
Everyone should check their credit score at least once each year. You can use online calculators to get an idea of your buying power. Knowing your credit score before shopping for a home can prevent disappointment and save you from looking at homes outside of your qualifications.
Now is a good time for an honest evaluation of the relationship you have with your friend and potential real estate partner.
3. Have an Open Relationship
You can keep all kinds of secrets from a friend because after all, some things are better left unsaid. Your finances aren’t one of them.
You cannot keep financial secrets when buying a home. Eventually, someone will uncover them—probably your lender. When you co-own a home, the lender considers the finances of both borrowers.
If your secret is an awful credit score, once the lender begins the loan process, the secret is out!
Before talking with a lender, have a serious sit-down where you both share everything about your finances. Be open about your income and your spending habits. Share your credit scores so that there are no surprises when you move from the pre-qualification to the pre-approval stage.
The open relationship is protection for both co-owners. The financial discussion provides a clear picture of the financial health of both friends. And if one (or both) isn’t financially prepared for homeownership, backing out of plans is simple at this point.
Once you determine whether you can afford a home, take a look at the bigger picture.
4. Discuss Your Long-Term Plans
Buying together sounds fun today and takes care of your need for shelter. But what are your goals for the future?
What if you break up with your best friend (it happens)? What if you meet someone and that someone owns their own home?
Maybe you’ll do what most people do and move on to the next stage of life.
Before signing any mortgage documents or owner agreements, talk about your long-term goals. Just because you sign-up for co-ownership doesn’t mean you must own the home together until the end of time. But you should commit to a set amount of time.
Think through and discuss what options you might have if you sell the home. What can you do if one owner changes jobs and transfers to another state? Or gets married?
One co-owner may have the first option to buy the other out of their portion of the home. Selling the house is always an option too.
What you don’t want is a ruined relationship. Understanding each other’s long-term plans before buying a home together saves a soured friendship later.
The way you set up your partnership can also save the relationship from future problems.
5. Choose Your Partnership Wisely
Whether you’re townhouse partners or you buy a single-family home on the lake, you will indicate on your mortgage documents the type of partnership you want.
Since most first-time buyers and even seasoned investors are not legal experts, talk to a real estate attorney and get some advice before signing anything.
Usually, you have two options when buying a home with a co-owner—tenancy in common or joint tenancy with rights of survivorship.
If you choose tenancy in common you can choose how you split the ownership of the property. For example, if you pay the majority of the downpayment, you could own the majority of the property. If the other co-owner dies, their portion goes into their estate and the designated heirs deal with it.
Choosing joint tenancy with rights of survivorship means you split ownership equally. When one owner dies, the other owner automatically inherits their share.
Confusing, right? A lawyer can advise which is the best option for your situation and make sure documents have the correct legal language.
This brings us to another piece of legalese—the owner agreement.
6. The Owner Agreement
All this legal talk, and you thought you were just buying a house with a friend!
Your lawyer may just be your best friend during the home buying process, especially when you start signing contracts and agreements. Before you sign any other contract, sit down and discuss a co-ownership agreement.
You’ve already had the most awkward conversation, finances, now it’s time for a serious discussion about legal rights and obligations. A co-ownership agreement takes into account both of these as well as any potential future issues and provides solutions in advance.
Co-ownership agreements can include whatever points you decide are important but at the minimum, should include:
- Price of the property
- Payment for the property
- Payment of expenses
- Maintenance and repair responsibilities
- Sharing of tax benefits
- Exit strategies
- Sharing of profits if/when you sell the home.
- Resolution of disputes
The agreement is a legally binding document best written by an attorney with your input. You’ll spend time before meeting with your attorney deciding on things like who will be responsible for the range of responsibilities expected when you own a home.
7. Who Will Do What?
Owning a home together means taking on all the chores a.k.a. cleaning, yard work, and repairs.
If you’ve ever shared living space with another person you know it can get irritating when two people don’t share the same clean house standards.
One person insists on a sparkling clean kitchen and bathroom while the other one simply rinses the dirty dishes in the sink and uses them for the next meal. One expects a clear pathway from the garage to the house but the other doesn’t mind tripping over the lawnmower, garden hose, and the recycling bin.
Of course, you could make easy on everyone and hire out the cleaning, lawn care, and other general maintenance. At that point, you might as well hire a property management company.
Start the co-ownership adventure out right and don’t assume anything. Instead, talk about expectations and come to an agreement before taking ownership of the house.
You’ve decided on who will care for the lawn and who will clean the guest bathroom. Have you talked about who pays the bills?
8. Just Pay the Bill
We’re not talking about the mortgage—the mortgage is usually split based on the percentage of ownership.
What about utilities, waste service, and cable/internet? You’d have a hard time splitting those expenses according to who used more.
And no matter how well you plan, home ownership always comes with hidden costs.
Work together on a budget that’s fair to both owners leaving room for changes when necessary. Remember, life happens and sometimes a person’s financial stability takes a hit and temporary adjustments may be necessary.
Budgets can and often should be flexible. What you decide when you start out may not work the way you both anticipated. So, go back to the negotiating table and figure out how you can tweak the bill paying system.
The important thing, aside from making sure the bills get paid, is that you don’t destroy the relationship because expectations weren’ clear from the beginning.
9. Don’t Ruin the Friendship
You’ve been best friends forever. Or maybe you’ve been in a committed relationship long enough that you know each other well. Neither of you would ever dream of hurting the other one.
You’re both trustworthy, dependable, and honest. Not to mention financially stable and ready for homeownership.
Unless you’ve never lived with anyone else you’re already aware that two people living under the same roof sometimes experience conflict. The water bill is higher than anticipated because one person takes long showers. One owner invites people over every weekend and doesn’t plan for the extra food.
You could write a book about the conflicts between friends and partners. The key is not letting the conflicts sour the relationship.
Look at co-ownership as a business arrangement. That may make it easier to avoid hurt feelings if the unexpected happens.
Above all, enjoy participating in the dream of home ownership and be thankful you found someone who can help make it possible.
Are You Buying a House with a Friend?
You’ve figured out what type of house you want, been pre-qualified, and performed the rest of your due diligence. You know, all those things we just shared with you about budgets, long-term plans, and signing agreements.
Now, you’re ready for the step in the adventure of buying a house with a friend.
Having a team on your side dedicated to ensuring you get the keys to your new home quickly and without any extra stress will make it feel more like an adventure and less frustrating.
Get to know us and learn how we can help you and your friend enjoy home ownership!