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 couples or individuals, however – you can buy a house with a friend, too.
But how is buying a house with a friend different from purchasing a home yourself or with a partner? Let’s look at some of the reasons you might consider buying a home with a friend and how to do it, should 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.
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. Do you want to share a single-family home or multifamily home – and do you intend to use the house as a primary residence or for investment purposes? 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, including joint tenancy and tenancy in common. When considering what type of ownership to go with, consider what you and your friend’s future priorities are. With something like tenancy in common, you can split up your shares of the home equally or unequally among heirs should one of you pass away, but the process will have to go through probate.
With something like joint tenancy, on the other hand, each co-owner has equal shares of the home and can pass them on without going through probate – but there are strict rules surrounding right of survivorship. If you’re unsure which way you want to share title, consider talking to a real estate attorney to help you understand how the different processes work.
5. Create An Agreement
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 could include things 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 Property Agreement makes it legally binding to prevent future issues and disagreements.
How To Buy A House With A Group Of Friends
It’s actually possible to purchase a home with an entire group of friends if you really wanted to. 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.
- Affordability: 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.
- Potentially easier to qualify: Since lenders will look at your combined income and both of your credit scores, it might be easier to qualify for a mortgage with good interest rates with the help of a co-buyer.
- Larger down payment: With your combined finances, you will likely be able to make a larger down payment with a co-buyer as well.
- Possibly avoid PMI: 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).
- 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.
- Can increase cash-flow if you buy an investment property: It can be more affordable to start investing in real estate with the help of a friend. This can be a great way to start investing more affordably and making some passive income on the side.
- Build equity more easily: When renting with a roommate, you pour your hard-earned money into an investment that you don’t own or benefit from in the long run. By buying a house with a friend instead, you can build equity together and create actual value rather than just paying rent and getting nothing in return.
- One person’s credit affects the other’s: If one person in a pair of co-buyers has a poor credit score, it can “drag down” the financial profile of both of you. 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.
- Difficult to share responsibilities and financial obligations: Sharing a home with a friend is a big commitment and comes with some potentially difficult conversations. 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 DTI may look 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: If you’ve ever heard the saying “don’t room with your friends,” know that it’s not always true – but it can be, especially when you’re both responsible for a mortgage and not just rent. Before buying a house with a friend, consider your relationship with that person and whether buying a home together is worth the risk of strain on your friendship.
The Bottom Line: Don’t Enter Into This Partnership Lightly
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.
Whether you’re buying a home with a friend, partner or on your own, you can explore your options and get started today with Rocket Mortgage®.