Financial Advice

Buying a Home with a Friend

Buying a Home with a Friend

Buying a home can be a wise financial decision because it allows you to make an investment rather than spending money on rent each month and getting nothing to keep in return. As a homeowner, you have the potential to build equity as you make mortgage payments each month. You also might see your home's value increase if you make improvements or market home values rise.

In many areas of the country, being able to afford a home is a challenge. Home values are high, and if you are still at the start of your career, your income might price you out of the market. If you are not ready to buy a home on your own, it is worth considering buying a home with a friend.

Advantages of buying with a friend

  • You are more likely to qualify for a mortgage on a home if you have two incomes and two savings accounts that you can tap into for the down payment and closing costs.
  • Buying with a friend allows single people who would only want one or two bedrooms to buy in neighborhoods where there aren't any smaller homes available.
  • You can share the cost of utilities, taxes, insurance, and upkeep on the home, helping you both have low ongoing costs.

Disadvantages of buying with a friend

  • You will be in a difficult financial situation if your friend does not make payments on time because missed payments affect your credit score.
  • You will need to sort out among yourselves how you will pay for needed repairs and improvements, and how you will decide what projects to undertake.
  • One of you may want to move, and you will have to figure out what to do with the home you own together.

Methods for buying

The typical method for buying a home together is to apply for a mortgage together and have both of your names on the property title. You can either be listed as tenants in common, which allows you to own different shares of the property or as joint tenants, which is an equal split. This method has the advantage of giving all buyers specific legal rights to the property.

If one of you has an especially strong financial situation, you could have just that person apply for the mortgage. The lender will then consider only that buyer's credit score, income, and cash on hand for the down payment. You can then work out an arrangement for how you will handle the payments between yourselves.

Exit strategies: How to move on

It is inevitable that eventually, one of you will want to move for a new job, change in relationship status or just to have their own place. Therefore, you need to have a plan in place for what you will do if or when this happens. You might agree to get the property appraised and allow one of you to buy out the other's ownership interest. Alternatively, you might sell the property together and split the proceeds. Legally, co-owners can typically sell their interest in the property to someone else, so you should discuss whether you want to keep this available as an exit strategy and whether to place constraints on any new co-owner.

Making it work to buy a home together

If you are serious about buying a home together, hire a lawyer to create a contract that includes all the details. You should identify the contribution each party made to the downpayment and how responsibilities for making your monthly mortgage payment break down. Also, document which of you will claim the mortgage interest tax deduction, how you will finance home repairs, and any guidelines for shared home use. If you have a legal contract, it will be easier to settle any disputes that arise later and hopefully make owning a home a positive experience for everyone.

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