Buying a home with a friend? What you need to know
Jan. 26, 2022
5 min read
What we'll cover
Options to consider with a co-ownership mortgage
Different kinds of co-ownership agreements
Pros and cons of buying property with friends
You went halfsies at dinner out last weekend, shared your sourdough starter during the pandemic and split your iris tubers when the plant started taking over your flower bed. But buying a house with a friend? Turns out it could be a smart move if you're ready to buy a housebut it seems out of reach financially on your own.
What is a co-ownership mortgage?
A co-ownership mortgage or joint mortgage is a mortgage loan that's signed by two or more people. Each person on the mortgage is responsible for the money you’ve borrowed and has an ownership share in the property that's associated with it.
You can own a home with friends as tenants in common, which means each person owns part of the home — though not necessarily equal shares. So, say you buy a home with three friends, but you make the majority of the down payment. You might structure a tenancy in common (TIC) agreement so that you own 40% of the home and your three friends each own 20%.
With tenancy in common, you can sell your ownership stake at any time, and you don't need your friends' approval first. If you sell your share of the property to someone else, they assume responsibility for their part of the mortgage. Or if a tenant in common passes away, then their ownership share is passed on to their heirs.
You could opt for joint tenancy in which all joint tenants in a property own it equally. In this scenario, if you want to sell your share of the property, you must get the other owners' approval first. And if a joint tenant passes away, their ownership stake gets passed on to the remaining joint tenants.
Can two friends get a mortgage together?
Yes — assuming they meet the requirements established by the lender to get approved for a mortgage. That includes credit score, income requirements and debt-to-income ratioguidelines.
Buying a house with a friend can help ease the financial burden to a degree, especially in a tough housing market. Rising home prices can make it more difficult to afford a mortgage, even when interest rates are relatively low. Meanwhile, saving thousands of dollars for a down payment and closing costs can be challenging, especially if you're paying off student loans and other debts.
So, it’s not surprising more people are choosing this ownership option. In fact, the number of people with different last names who bought homes together has increased by 771% since 2014, suggesting people are increasingly open to the idea of buying a house with friends, roommates or other non-family members.
How to buy a house with a friend
Start the homebuying process by discussing what type of home you're interested in and what area you'd like to live in. The goal is to make sure you're roughly in agreement about what you want.
The next step? Reviewing your finances to determine what each of you can afford to pay toward buying a home. This includes the mortgage payment, maintenance and utilities, as well as the down payment and closing costs.
It’s also a good idea to discuss your credit scores, since they’ll help you gauge how likely you are to be approved for a joint mortgage. You should also talk with several lenders, such as Ally Home, to learn about mortgage options and decide which type of loan is best for your personal circumstances.
It can also be helpful to getpre-approvedfor a mortgage (this lets sellers know you’re ready to buy and able to do so) before you start house-hunting, then connect with an experienced real estate agent who can help you scout out properties. Your agent can also walk you through the next steps once you make an offer on a home.
Setting up a co-ownership agreement can save you time and headaches when buying with a friend. It can cover:
How you’ll both own the home (i.e., tenancy in common vs. joint tenancy)
What happens if one of you decided to sell your share and how much notice you’d be required to give in advance
What happens if one of you were to pass away
How you’ll divide up the monthly mortgage payment and other expenses
How you’ll handle shared financial obligations if one of you were to lose your job or get sick and be unable to work temporarily
Rules for things like having guests over or pets
How specific you make this agreement is up to you and your co-owners. You can create a co-ownership agreement yourselves or hire a real estate attorney to help if you’re not sure what to include.
Finding the right mortgage lender to work with matters. It’s important to find one that offers joint mortgage loans and has loan options that fit your financial situation. Your joint borrowing options could include:
This approach can have its benefits, but it’s not for everyone. Before you get too far into the joint home-buying process, here are a few things to consider.
Advantages of buying a home with a friend
Shared mortgage payments. Affording a mortgage by yourself might be difficult, but it can be easier when splitting thecost of buying a home with friends.
Easier approval. You could have a smoother experience when one or both of you has a good credit score, solid income, employment history and a low debt-to-income ratio.
Lower down payment. Buying a home with someone else means you’re not shouldering the entire down payment yourself.
Drawbacks of buying a home with a friend
Barriers to approval. Just because you have a great credit score doesn’t mean your friend does (or vice versa).
Less control. When you share ownership, neither of you has complete control over what happens to the property. A co-ownership agreement can minimize the potential for conflict but it’s still possible you’ll have disagreements.
No guarantees. Signing your name to a mortgage loan makes you responsible for the debt. If your friend fails to keep up their end of the bargain, you may be left responsible for full mortgage payment.
Is co-buying right for you?
Buying a home with a friend could beat renting if you’re able to save money on housing costs. You may also benefit from being able to share responsibilities for maintenance, repairs and upkeep instead of having to do all of it yourself.On the flip side, you’re counting on someone else to pay their fair share. If they were to get married, for example, or move to a new city out of the blue, you could be left in the lurch. So before buying a home with friends or roommates, consider how reliable they are and what kind of backup plan you might need in case things don’t work out.
Friends and homeowners?
If you’re comfortable sharing your mother’s secret salsa recipe or letting your best bud borrow your car, then purchasing a house together might be worth exploring — especially if homeownership is a life goal for you both, but personal financial situations have put it slightly out of reach. If you can navigate the potential risks, it can be a move that takes your friendship to a whole new level.