As house prices rise and qualifying for a mortgage becomes trickier, more and more people are considering co-buying a home with friends or family. At first glance, it seems like a no-brainer, especially if you’re single. After all, many of us have saved money by renting with friends.
Indeed, co-buying is a great way to get a foot on the property ladder quicker than you would if you were going it alone. With that in mind, let’s look at everything you need to know about co-buying a house with friends or family.
How Does Co-Buying a Home Work?
Co-buying is basically when two or more people purchase a home together. There are two main ways to go about it:
Tenancy in Common
This is more common among unmarried co-buyers, like friends, family members or business partners. Each tenant owns an individual stake in the home, typically proportionate to the amount they invested in it.
They have the right to transfer their stake at any time, but the home can only be sold if all owners agree to it. Once sold, the proceeds will be divided among each party based on the percentage they’re entitled to.
If one of the owners passes, their share in the home makes up part of their estate and will be transferred to their legal heir.
Joint tenancy is more common between married couples and long-term partners but can also work for other co-buyers. Each tenant has full ownership of the house, even if they didn’t invest the same amount of money. If one party passes, their share of the property is transferred to the remaining co-owner(s).
The Main Advantages of Co-Buying a Home
1. Mortgage Approval Is Easier
Lenders often want you to pay at least a 5% down payment plus closing costs. This goal is far more achievable if you partner with friends or family.
In the same vein, lenders will want to see your What is a credit report? While a credit score is a three-digit number that lenders... More before they offer you a loan. It only takes one mispayment to tarnish your score, meaning you’ll have to spend more time building it back up. But, when you buy with someone else, the lender will take an average of each credit score, making it easier to meet requirements.
2. Shared Expenses
From utility bills, mortgage repayments and insurance payments to property taxes and maintenance costs, you’ll have several costs to keep on top of once you’ve moved in. Of course, it’s much easier to control these expenses with two or more people. In turn, it’s easier to stay debt-free and better able to save up.
3. Wider Choice When Buying
Combining your finances with a co-buyer will inevitably increase your homebuying budget, meaning you’ll have a far wider range of homes to choose from. So, instead of each of you buying small homes in out-of-the-way places because it’s all you can afford, you’re more likely to be able to purchase a larger home in a more desirable neighborhood.
4. It’s a Good Way to Build Up Equity
The more mortgage payments you and your co-owner(s) make, the higher your equity will be. So, the longer you live together, the more savings you’ll technically have (as opposed to renting together, where saving up can be more challenging). So, when the time comes to go your separate ways, you’ll each have gained some money, which you can then use to put a down payment on your own place.
5. You Don’t Have to Live Alone
Beyond the various financial advantages, buying a home with a friend or family member comes with a great social benefit. You’ll almost always have someone to hang out with while retaining your own space when needed.
The Disadvantages of Co-Buying a Home
1. It’s Not an Easy Situation to Get Out Of
After a while, there could be any number of reasons why you and your co-buyer(s) may want to go your separate ways. From losing a job to finding the love of your life or simply falling out with each other, if the time comes for one of you to move on, it’s not always easy.
If someone wants to move out, either the other party must buy their share, or you’ll have to agree to sell. Either way, it can take several months to process, leading to friction and stress.
2. Financial Issues
All is great while everyone pays their way. But, after a while, one party may start to miss payments. It may not be their fault — they could lose their job or become too ill to work — but either way, missed payments will impact everyone involved. Lenders will report all the names on the mortgage to credit agencies, meaning your credit score can drop even if you’ve kept up with your payments.
3. More Difficult to Obtain Other Loans
Co-buying a home may mean splitting the mortgage payments, but on paper, you’re responsible for the entire sum. As a result, your What is the debt-to-income ratio (DTI)? A borrower’s debt-to-income ratio is their debt (monthly payments)... More will become skewed, making it much harder to borrow money for things like vehicles or business interests.
How to Make Co-Buying Work
Having weighed up the pros and cons, let’s look at how to make co-buying work. Communication is essential, and it’s important to go in with eyes wide open. Here are some tips:
1. Don’t Buy With Anyone You’ve Never Lived With Before
No matter how well you get on with someone, you never truly know a person until you’ve lived with them. The stakes are high when buying a home, and it’s definitely not the time to find out that you can’t stand living together.
2. Research Your Co-Buyer(s)
For best results, treat co-buying a home as a business transaction. Regardless of how long you’ve known your potential co-buyer, don’t be afraid to dig beneath the surface and discuss the serious issues. Be sure to find out what their intentions are for the home:
- Will it be a social hub with regular parties or a relaxing place to chill after a hard day at work? Your intentions must align to prevent friction later on.
- How long do they plan to keep the home before moving out? It’s best to agree on a minimum time frame and be realistic about how long it’ll take you to be able to afford to move on.
- What kind of home do they want, and what are their must-have features? Ideally, you should each create a list of wants and needs and compare them — if they align, all good, but if they’re drastically different, you might not be a good fit.
Essentially, don’t assume anything. Discuss the nitty-gritty and make sure you’re on the same page.
3. Discuss Finances
Be honest as you each talk about your credit scores, savings and any current debt. If one of you has a low credit score or insufficient savings, it’s perhaps best to hold fire. Never over-promise, and if you need more time, set a realistic time frame that all parties are happy with.
Figure out what everyone can bring to the table financially and what stake you’ll each have in the home if you’re planning to be tenants in common.
4. Assign Responsibilities
Before purchasing, be sure you each know your responsibilities. For example, who will take care of paying bills, buying furniture, maintenance tasks, etc.? Ideally, split these responsibilities as soon as possible so everyone knows what to expect before moving in.
5. Plan for Disputes and Anticipate the End
Nothing is ever perfect, so be sure to plan for the worst-case scenario in advance. Again, be pragmatic and prepare for the worst by agreeing to a clear exit strategy. Be sure to also consider potential problems that are beyond anyone’s control.
Think about the following scenarios and agree on how you will deal with them:
- One co-owner meets a partner and wants them to move in
- One party must move out (be it for work, due to illness, etc.)
- One co-owner wishes to rent their part of the home out
- One of you can no longer afford the payments (job loss, accident, etc.)
- One co-owner passes
- Significant costs (such as an essential repair)
6. Put It in Writing
Drawing up a legally binding contract of everything you’ve discussed and agreed on can save you a lot of problems later on. It removes the emotional aspect in case things go wrong and helps you put resolutions in place. Aim to cover everything mentioned above and anything relevant to your circumstances.
The best way to make co-buying a home with friends or family work is to agree to a solid plan. You need to be on the same page about all the essential things, and ideally, you should set out a clear end goal.