Co-buying is a superb way to get on the property ladder a little earlier than you might be able to afford to by yourself. It also offers numerous other financial and social advantages, but what about the disadvantages?
In an ideal world where everything runs smoothly and people remain best friends for life, co-buying would appear to be a great solution. However, nothing is ever perfect, and circumstances can change in the blink of an eye. In such times, co-owning a home with a friend or family member can cause friction and even lead to financial losses.
If you’re thinking about co-buying a home with a friend or family member, it’s worth knowing the potential pitfalls before jumping in.
It’s Not Easy to Walk Away
There are many reasons you or your co-buyer might want to go your separate ways. Circumstances can soon change unexpectedly, a job loss, meeting the love of your life, or suffering a debilitating illness are just some of the possible scenarios. You might simply fall out with your co-buyer, to the point that it’s unbearable to live together.
When you co-own a home, it’s not easy to walk away since both names appear on the mortgage. The only way for one of you to move out and the other to stay is for the remaining party to buy the other’s share. This is rarely feasible, so you’ll most likely have to sell the house and both move out. Either option can take several months to complete.
While all may run smoothly at the beginning, with both parties contributing their share of the bills and mortgage payments each month, things might not stay that way. If one party starts to slack, the other can suffer. Either one of you could lose your job through no fault of your own, but if you’re then unable to make payments on time, lenders will report both the names on the mortgage to credit agencies. This will have an impact on both of your credit scores.
Unbalanced Debt-to-Income Ratio
Despite splitting the mortgage payments, as far as lending institutions are concerned, you’re responsible for paying the entire sum, as is your co-buyer. This can skew your debt-to-income ratio, making it far more difficult to borrow money for more personal matters, such as business or auto loans. One workaround is for you and your friend to apply for loans together, though this can be severely restrictive.
Making It Work
Going in with your eyes open is essential, and it’s very important to know the potential pitfalls. First and foremost, never buy a home with someone if you’ve never lived with them before. The stakes are simply too high to find out that, while you’re best buddies, you simply cannot stand one another’s habits at home!
Treat the procedure as a business transaction and don’t feel bad about researching your future co-owner. Look at their finances and credit score, and assess how likely they are to keep on top of payments. You need to be sure that they won’t leave you in the lurch, no matter how close you are.
Get It in Writing
While it may seem strange to make a formal contract with a friend or family member, it’s well worth writing up a legally binding agreement before purchase. With this in place in case things go wrong, there’s less emotion involved and a higher likelihood of dealing with any issues in a timely manner. Try to cover the following points:
- What is the structure of the mortgage – a 50/50 split or something different.
- What happens when one party wants to sell the house.
- Who is responsible for maintenance and costs.
- The process for one party buying the other out.
- The process if one party defaults on a payment.
There are some big sticking points to co-buying, but it can offer numerous advantages as well. Be aware of both, and make a balanced, informed decision. If you do go for it, be sure to write up a contract that protects you both.