Growing up watching the TV show Entourage, my friends and I always fantasized about purchasing a home together in our early adult years and living out the same lifestyle our Hollywood hero, Vincent Chase, did with his family and friends. We knew that as individuals, we were unable to purchase the home of our dreams quite yet. However, if we joined forces, just maybe we could come up with enough buying power to get a house we could all thrive together.! Buying a home with a close friend or relative can be an excellent alternative to the hefty expenses that come with sole ownership. Why not enjoy the benefits of owning a home for a portion of the price? Well, co-ownership does have its own repercussions. If my friends and I decided to move forward on our master plan, here are some important pros and cons we would consider before doing so.
It is easier to qualify for a mortgage.
When you buy a home alone, only your income and credit information is taken into account by a lender in order to qualify you for a loan. However, when you purchase a home jointly with a friend, his or her income and credit information is additionally factored into the lender’s decision. This may enable you to purchase a more expensive and spacious home as you could become eligible for a higher loan amount. Additionally, the lender factors in the average of both credit scores which could be a game-changer if one of you has a low credit score. This means you can afford a pricier house when buying with a friend or simply qualify if you single-handedly are unable to.
Quick Tip: Make sure to get prequalified for a loan before you start your home search. It would be a bummer if you found your dream home without knowing it’s $100,000 more than you both can afford!
Repayment becomes easier.
Repayment of your mortgage loan becomes easier when you buy a home jointly with a friend or family member. As both of you have put forward money for the down payment, you can then share the repayment, making it easier to come up with the monthly installments to the lender.
Quick Tip: Before a decision is made, make sure to be transparent about what you can both individually contribute. Things can go south fast if not all parties are comfortable with the situation before the big purchase.
You can share monthly expenses.
Buying a home together typically means you then choose to share monthly expenses such as utilities and ongoing maintenance. This is one large appeal of co-ownership as shared expenses can drastically lower the financial burden of owning a home. .
Quick Tip: Ensure you set expectations beforehand so you and your housemate understand exactly what each others plan to contribute.
It becomes difficult to move.
Joint ownership could make the decision to move a lot more difficult. As you are not the sole owner, the decision to sell your property must be made by both of you. Say you get married and want to move out. Does your friend have the option to buy you out? Or do you decide it’s best to sell the house altogether? If so, how will the proceeds be split?
Quick Tip: Think about it ahead of time and create an exit strategy so you don't run into trouble when the day comes.
Risk of damage to credit score.
The arrangement works well if your friend continues to pay his or her share of the monthly repayments on time. But if they stop paying their share due to some type of financial trouble, you are then liable to pay the full amount every month. Even if you split ownership 60/40 or in any other way, the lender will come after you to cough up the mortgage payment in full. If you delay payments or miss repayment in a few months, it can have a serious negative impact on your credit score.
Quick Tip: It’s up to you to screen your friend or family member. Again, make sure to be transparent about what you can both individually contribute and best understand each other's financial capabilities.
It can be difficult to qualify for others loans.
Even if you and your friend split the mortgage payment evenly each month, each of you is responsible for the entire mortgage payment in the eyes of you lender. If your friend starts to slip, it can make your debt-to-income ratio appear high, even if you’re financially stable. A high debt-to-income will make it much harder to qualify for other loans. You can troubleshoot this if you’re a married couple by applying for loans together, however, odds are you won’t want your friend on your car loan—and he or she won’t want to be there either.
Quick Tip: I can’t stress this enough -- know the financial background of your housemate!
Buying a home with family members or a friend can work well in everyone's favor. It’s an excellent opportunity to save big on a loan, split costly expenses, and still claim ownership of a house. Nevertheless, there are challenges that come with such a major commitment, and it’s crucial you don’t rush into the decision unprepared. Do your homework -- understand each other’s financial ability and decide whether your housemate is capable of paying their share of the costs and on time. To play it safe, it’s a good idea to speak with an attorney who can assist in establishing ownership rights and help you decide how you’ll both pay for ongoing expenses. Now, go live out those Entourage dreams!