Buying a house with a friend is a common option if you want to make an investment, split expenses to meet financial goals sooner or just want to live with someone. There are a lot of laws in place for buying a house for married couples, but that doesn’t mean buying with a friend has to be hard. That said, there are a few extra steps you need to take before you and your friend sign the dotted line to purchase a home.
Let’s look at how buying a house with a friend is different from purchasing a home by yourself or with a spouse, some of the reasons you might consider buying a home with a friend and how to go about it if 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 want to, you can even purchase a home with a group of friends. As long as you and your friend(s) can agree on a way to share ownership of the home, qualify for a mortgage, and can afford the payments, you can typically buy a house together.
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How To Buy A House With A Friend
When buying a home with a friend, you generally follow the same home buying process as buying a house by yourself or with a partner. Before committing to buy with a friend, here are a few things 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 want to make sure you choose wisely. You’ll want to be aligned on priorities, trust your friend and ensure you’re both financially stable enough to buy a home. You’ll not only be living with this person, but splitting mortgage payments, so it’s important to know this is a friend you can rely on.
2. Have An Open Conversation About Finances
Make sure to have an open and honest conversation about your combined finances. As co-owners, you are both responsible for mortgage payments. 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. With this in mind, knowing your friend’s credit history and their full finances is important. It’s especially crucial to know if there are any negative items that might impact your ability to qualify for low interest rates.
A few things you might consider discussing include:
- Credit history
- Your combined income
- Your combined debt
- Your total savings
- Your down payment expectations
3. Decide What Type Of Property You Want To Buy
You also want to make sure that you and your potential co-owner agree on what type of property you both want to buy. Do you intend to use the house as a primary residence, as an investment property or maybe use it for both purposes? Keep in mind that with a residential mortgage, you can buy a multifamily home with up to four units.
You’ll also want to consider if you’re OK with a long-term roommate. This can be particularly important if you plan to buy a single-family home. Making sure these types of expectations about the property are aligned can help simplify house hunting.
If you and your future co-owner have different plans in mind for the property, it may not end well. So it’s better to make sure you’re both on the same page upfront.
4. Pick Your Preferred Type Of Ownership
When buying a house with another person, there are several different ways to share ownership, and the ramifications of your choice can be big. Make sure you and your friend meet with a real estate attorney to fully understand what each type of property ownership means. Buying a house with a friend is fairly common, so an attorney will be able to advise on the best arrangement for you and your specific scenario.
Let’s take a look at some of the most common types of ownership for friends purchasing a home together.
Joint Tenancy
With a joint tenancy, you and your friend own the home equally, completely and in equal shares. This is the default situation for married couples who own a home together. Joint tenancy comes with rights of survivorship, which means that when one co-owner dies, the other owner automatically inherits their share of the house. Joint tenants cannot sell their share in the home without the permission of their co-tenant.
If you and your friend plan to make the house your primary residence, this may be the best type of ownership to choose. You most likely wouldn’t want your housemate to sell their share without your permission if you’re sharing the home completely.
Tenancy In Common
With a tenancy in common, friends can choose how much of the home they want to own, if they can sell their share and how they want their share to be distributed should they pass away.
What makes tenancies in common popular among friends is that it allows them to sell their share in the property and designate an heir. For example, let’s say you and a friend buy a vacation home together and plan to alternate weekends. Your friend selling their share to a stranger would be much less complicated here than if they sold their shares to a home being used as a primary residence.
5. Put It In Writing With A Legal Agreement
Even if you’re confident in your choice of home co-owner, it’s important to create a Cohabitation Property Agreement or similar legal agreement. Because you lack the typical spousal legal protections of a married couple, 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. You could simply decide these things with your co-owner, but the cohabitation agreement makes it legally binding to prevent future issues and disagreements. Your agreement might include decisions including; splitting utilities, how to handle housing costs or even buyout agreements among other exit strategies.
If you already purchased the property with a friend without a legal agreement in place, you can still create one after the fact. It will help avoid problems when selling or bequeathing your share of the home. Keep in mind, that you can’t easily alter your ownership type after buying.
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Why Is Buying A House Different For Friends Vs. Married Couples?
Married couples enjoy statutory legal protections that don’t extend to unmarried people, even if they have a familial relationship, like siblings or parent and child. There are laws in place that protect a surviving spouse from losing their home during their lifetime. A court can use marital property laws to divide property between spouses should they divorce.
However, those same statutory protections for spouses can easily be created between parties contractually. A lawyer can help you have some tough conversations and then craft a binding agreement that embodies the intentions of the parties and removes some uncertainty.
How To Buy A House With A Group Of Friends
It’s also possible to purchase a home with a group of friends. Just like buying a house with one other person, there are multiple ways to share title and ownership among multiple people. However, before you decide to split ownership with a group, you should consider the risks of sharing such a large investment.
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 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 to document owner expectations and plans for the home’s future.
Should You Buy A House With A Friend? The Pros And Cons
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 to help you decide whether it may be a good choice for you.
Pros
In sunny times, the benefits of buying a home with friends can seem endless.
Home Affordability
Just like having a roommate when renting, 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.
That means that lenders will look at your combined income and both of your credit scores, so it might be easier to qualify for a mortgage with good interest rates with the help of a co-buyer. Moreover, by combining finances, you also will likely be able to make a larger down payment with a co-buyer.
Avoid PMI
If you can make a larger down payment and put at least 20% down, you can also avoid paying for private mortgage insurance (PMI) on a conventional loan. This is an insurance that benefits lenders should you default on your mortgage before you reach a threshold of 20% of home equity. Avoiding PMI can save homeowners money in the long run so this is a big advantage.
Lower Individual Expenses
By splitting the costs of a home with a friend, your expenses are halved compared to buying the house yourself. In addition to reducing your down payment, you can split things like closing costs and the other expenses of homeownership.
Share Responsibilities of Homeownership
Owning a home is more work than you think if you’ve never owned one before. Having someone to share the workload with can be a huge help.
On top of that, most properties do a lot more work these days than they used to. Vacation homes can also become investment property via short-term rental sites like Airbnb and Vrbo. This can be a great way to start investing more affordably but providing these services can be more work for homeowners.
Build Equity More Easily
If you’ve been renting, you know that you’ll never see your monthly rent payment again. It’s being used to build your landlord’s equity in their building. By buying a house with a friend instead, you can build home equity together and create actual value rather than just paying rent with no potential to earn an investment on your money.
Cons
When clouds roll in, however, homeownership with friends can pose unique challenges.
One Person’s Credit Affects The Other’s
If one person in a pair of co-buyers has a poor credit score, it can negatively impact your combined finances. If your co-buyer has past credit missteps, it could impact what kind of loan you can afford and lower your overall combined credit score. Additionally, if they fall behind and you miss a mortgage payment, your credit will take a hit too.
If your friend’s credit score makes it hard to qualify for a loan, you may be better off buying the home on your own and renting part of the house to your friend.
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. Since both of your names are on the mortgage, you’ll likely have to refinance with just one of your names on the new loan. The remaining borrower needs to take on responsibility for the financial burden of the home by themselves. Depending on the situation, that might not be feasible.
Could Impact Your Debt-To-Income Ratio
Even if you split your mortgage payments with your co-owner, your debt-to-income (DTI) may look artificially 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
Before buying a house with a friend, consider your relationship with that person and whether it can withstand these challenges. You may have heard that it’s a bad idea to mix business with friendship. It’s not always true but owning a home together can get tricky, especially when you’re splitting monthly mortgage payments and housing costs.
If you think like a lender, it can help you evaluate your friend’s past behavior as a strong indicator of their future behavior. Know that if your friend doesn’t keep up on their bills now, they probably won’t pay reliably in the future. However, it doesn’t have to be a dealbreaker. For example, if your friend had missed payments due to unemployment, but is currently employed and made on-time payments the past few years, you might have less cause for concern.
If you have misgivings, you’ll need to set aside income to cover all the expenses yourself in an emergency fund. You can also take steps like setting up an automatic payment mechanism to make sure that shared bills are prioritized.
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FAQs
Still have questions about buying a house with a friend? We’ve got answers to some of the most common questions.
How do I protect myself when buying a house with friends?
The best way to protect yourself when buying with a friend or friends is to put things in writing. Having a legal agreement will offer clarity on who is responsible for payments if something goes wrong. You can’t plan for everything, but having an attorney help you draft a legal agreement can go a long way.
How will you cover housing costs if the unexpected happens?
It’s unpleasant to think about what happens if one of you becomes disabled or passes away, but it’s important to plan for the unexpected. Consider purchasing disability or insurance policies upfront that guarantee payment in either of those unfortunate situations so that you can keep paying the mortgage.
Can three people be on a mortgage?
Officially, there is no maximum number of people who can be on a mortgage. You should check with your lender regarding their specific requirements as it could vary. If you’re planning to buy with more than two people, make sure to check with an attorney about the best way to handle the arrangement.
The Bottom Line
Buying a home with a friend is a great way to make homeownership a more easily achievable goal for first-time home buyers, and it 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.
