Can you apply for a mortgage with a friend? Absolutely. The tricky part is finding the right friend and choosing a property that will help you both reach your financial goals. For people seeking financial stability through homeownership, buying a home with a friend has some clear advantages.
In this article, you’ll learn the pros and cons of buying a home with a friend, how to apply for a joint mortgage, and why a co-ownership agreement is essential for everyone.
THE PROS AND CONS OF CO-OWNING A HOME WITH A FRIEND
Buying a home with a friend is a big financial decision, no matter how you run the numbers. That said, you could reach your financial goals faster by co-owning a home as a residence, second home, or investment property. So if you’re ready to buy a home with a friend, these benefits and drawbacks are worth considering.
The Pros: Top Advantages of Buying a Home With a Friend
1. Buying a home with a friend could make it easier to qualify for a mortgage.
Qualifying for a home loan can be challenging. Lender requirements and criteria can be strict, and housing prices are high in many preferred areas.
When you apply for a mortgage with a friend, you get to combine your income to qualify for a home loan. Together with a combined income, you’ll most likely be able to afford a higher purchase price, get better loan terms, and even a lower interest rate.
2. Buying a home with a friend could help you become a homeowner sooner.
Want to stop renting and start building equity? Sure! But coming up with a down payment, closing costs, homeowners insurance, and cash reserves for maintenance can create an obstacle for many homebuyers.
Buying a home with a friend can alleviate this pressure while increasing your buying power. Together, you can make a larger down payment and prepare for closing costs. You’ll also have more cash reserves for immediate repairs that might be necessary. The result is a preferred mortgage with favorable terms and a lower mortgage rate.
3. As co-owners, you can share the costs of homeownership.
Property taxes, homeowner’s insurance, maintenance and repairs: it all adds up. Co-owning a home with a friend can help share the burden. There will be predictable costs such as property taxes and homeowner’s insurance that you could decide to split 50-50. There will also be maintenance and repairs that may be unpredictable.
It’s a good idea to create a co-ownership agreement to decide who will pay these costs and what percentage. Also, you’ll need to agree on other financial details, such as who will claim mortgage interest and property taxes as a deduction on their taxes.
4. As co-owners, you can earn passive income on your investment.
Joint homeownership can set the stage for shared passive income. As homeowners, you’ll have the flexibility to rent out a bedroom, use it as a vacation property, or otherwise earn investment income.
Common drawbacks of buying a home with a friend
1. Buying a home with a friend who has bad credit or heavy debt could make it harder to qualify for a mortgage.
Qualifying for a home loan can be challenging. Lender requirements and criteria can be strict, and housing prices are still rising in many preferred areas. If you have good credit and a steady income, but your friend has a lower credit score, this might make it harder to qualify for a low-rate mortgage.
2. As co-owners, you’ll need to agree on, well, everything.
When you own a property by yourself, you can make every decision, good or bad, and deal with the consequences. But, in a joint mortgage, you’ll need to agree on how things get done and who pays—home upgrades, landscaping, house repairs, you name it. From paint colors to remodeling the bathroom, you’ll need to make every financial decision together.
3. If one of you stops making mortgage payments, you could risk foreclosure.
If one of you stops paying the mortgage down the road, the other will need to make the entire payment or risk foreclosure. Talk openly about your finances with your friend. Look at your debt-to-income ratio and be willing to share your bank statements and financial habits.
Ideally, you want to be on the same page financially and have similar financial habits and goals regarding homeownership. Also, talk about an exit plan if one of you gets laid off from work or needs to relocate.
HOW TO APPLY FOR A JOINT MORTGAGE
First, share financial information with each other.
When you apply for a home loan with a friend, the lender will consider you co-applicants. Both of you will need to provide complete financial documentation, including bank statements, employment status, proof of income, debt statements, and credit scores. You can get a free copy of your credit report here.
Share your information with each other and be prepared in case the lender has questions about anything.
Next, talk with a qualified mortgage expert and start your application.
Discussing your homeownership goals with a mortgage advisor can take out the stress and save you money along the way. In addition, an experienced mortgage advisor can recommend custom loan options to fit your financial situation.
Buying a home with a friend shouldn’t be stressful or complicated. The right mortgage advisor can walk you through the process and lock in a low rate early.
Finally, choose the best mortgage structure for the title.
Every home purchase comes with a title. The title is a formal document that proves who owns the property. There are two main types of title ownership when you buy a house with a friend:
Tenants in Common: You can split the ownership (equity) of your home however you’d like in this arrangement. For example, you might own 70% and your friend would own 30%. With this type of ownership, you can sell your stake in the home without the permission of your co-owner. Similarly, you can designate your ownership to a relative if you pass away.
Joint Tenancy: In this arrangement, you and your friend will split ownership equally. You will each own 50% of the home and you can each borrow against your 50%. Worth noting, if one of you passes away, the surviving owner automatically gets full ownership of the home.
WHY YOU NEED A CO-OWNERSHIP AGREEMENT
When you buy a home with a friend, creating a co-ownership agreement is in everyone’s best interest. A co-ownership agreement declares the division of equity, who is responsible for what costs, and how the owners will share the costs of homeownership.
To buy a home with a friend, consider these questions:
- How do you want to split the equity? (e.g., 50/50, 70/30)
- Who will be responsible for property taxes?
- Who will pay for homeowner’s insurance?
- How will you decide the cost of maintenance and repairs?
- What happens if one of you gets married or has children?
- What happens if one of you loses a job or needs to relocate?
- Do you have an exit plan if one of you wants to sell?
- Do you plan to rent out a portion of the house for passive income?
We highly recommend hiring an attorney to draw up the terms of a co-ownership agreement. The agreement can protect your homeownership interests and your friendship.
Together, you can create a plan that works for both of you as new homeowners.
There are clear pros and cons to purchasing a home with friends or relatives. Buying a home with a friend could increase your buying power, help you qualify for a better mortgage, and get you into a home sooner. On the other hand, if one of you cannot keep up with the payments or walks away, it might be hard to refinance and qualify on your own.
Homeownership is a big financial decision, especially when you’re thinking about buying a home with a friend or relative. Working with a mortgage advisor can help you know what to expect and get a better mortgage.
Talk to a mortgage advisor to discuss custom mortgage options that can help you save money and get started. Buying a home with a friend can put you on the fast track to homeownership and financial freedom. If you’d like to understand more about co-ownership and how to apply for a joint mortgage, give us a call. We’d love to help.