With home prices increasing, it may make sense to pool your resources together with a trusted friend. Home Loan guidelines do not require that you be married to purchase a home together. In fact, you can even have a relative assist you with your home purchase using the Non-Occupying Co-Borrower buying strategy.
If you do choose to purchase together with a friend, here the four things you will want to consider in your decision to do so.
Seeing eye to eye with friends and family on the relative merits of music, movies, pickleball, gas versus charcoal barbecues can be a great foundation on which to build a relationship, but sharing the same tastes and interests does not mean you will share the same approach to finances.
To protect yourself, your credit score, your finances and most importantly your relationship you will want to cover every aspect of any real estate agreement, from purchase to sale. The agreement should be in writing with your co-signer before even bidding on a house. This process of creating an agreement will likely teach you a great deal you didn’t even know about your friend. And the agreement will ensure that you see eye-to-eye on the homeownership responsibilities.
You want to know how things will work, down to minor details. What if someone wants to rent out their half of their garage or part of the home? Who pays for the up-keep of the property, and is everything split evenly? What happens if a major repair is needed and one party can’t afford to pay?
Have a lawyer review the entirety of your written agreement for anything you might have overlooked—and to ensure it is legally binding.
It is also suggested that you consider opening a separate joint checking account that each party will fund regularly and equally. The money in the account will cover the household expenses and also establish a savings plan for those unexpected repairs that will certainly come up with homeownership.
A clear plan of how the account will be managed will also need to be agreed upon upfront. This planning will avoid unnecessary challenges in the future.
Before you begin your home search in earnest, you should have a budget and a maximum amount you agree to not exceed, no matter what.
The home buying budget should include not only how much home you can afford, but also how you will be managing the additional expenses that come with purchasing a home like closing costs, the down payment as well as the essential creation of othe escrow account for future property taxes and insurance payments. Ideally, the division of these costs should be put in writing to avoid any future conflicts as a result of planned or even increased costs.
Finalizing—and sticking to—a budget is very important if you’re buying a home with someone you’re not married to. It’s important to agree on scenarios where one co-owner cannot afford to cover agreed-upon expenses and what happens if one member refuses to live up to the agreement. We all know that financial situations change, so what agreement do you have in place if one of the members has a change in their income?
There are two types of co-ownership when you purchase and share a home with a person. “Tenancy in common allows you to split the ownership of the property along whatever lines make the most sense. If one partner contributes the majority of the down payment, they may own 70% of the property, and the other party may own 30%.”
But in this kind of agreement, if one party dies, their share does not instantly pass to the other co-owner. Instead, it will become part of their estate.
Joint tenancy with rights of survivorship is simpler. This typically happens if you are going to split the ownership of the property equally. When one party dies, the other party inherits their portion.
You will want to explore the different types of legal ownership as each one has a different goal and meaning. Here is a resource for you to review, however you may want to get educated from your legal advisor to ensure you make the right choice.
It’s hard to imagine the ending of a relationship before it has even started, but it’s wise to broach the subject before buying a home with a friend.
There are several questions you should be asking yourself and each other: “If one person wants to move, will the other person buy them out? Do you ultimately want to rent the house out? Or would you prefer to ultimately sell and split the proceeds?”
Most problems can be avoided with honest conversations and clear contractual agreements that establish who covers what and when, what happens if one person’s financial situation changes and, in the worst of cases, who will inherit the property in the event of one person’s death.
Buying a home has responsibilities that you must own. And when buying a home with a friend, those responsibilities increase. Being prepared and understanding what you are agreeing to is essential for your protection. The upfront work is important.
Karen Jones, a Licensed Mortgage Loan Officer (NMLS 307015), is located in Scottsdale and has been serving Arizona with their home lending needs for over 40 years. As a Certified Mortgage Advisor, Karen is dedicated in ensuring that her clients are well educated and prepared for their new home loan decision. AmeriFirst Financial, Inc. Grayhawk Office located in Scottsdale, Arizona.
The information contained, and the opinions expressed, in this article are not intended to be construed as investment advice. Karen Jones does not guarantee or warrant the accuracy or completeness of the information or opinions contained herein. Nothing herein should be construed as investment advice. You should always conduct your own research and due diligence and obtain professional advice before making any investment decision. Karen Jones will not be liable for any loss or damage caused by your reliance on the information or opinions contained herein.