With home ownership being out of reach for so many, a lot of people are turning to a new resource: each other. Amongst millennials especially, there is a new trend of friends pooling their resources to co-own property. Even before the pandemic, a lot of people were deciding that they’d rather enter into this arrangement than put off homeownership any longer. The number of co-buyers with different last names increased by 771% between 2014 and 2021, according to data from real-estate analytics firm Attom Data Solution.
For friends who plan on buying together, it’s essential that they put their respective financial obligations in writing, especially how much of the mortgage payment each person is paying, and how the equity is distributed amongst the owners. It’ll require that you have some difficult conversations, but when you’re mingling friendship and finances, a little discomfort is inevitable, even amongst the best of friends. So what are the pros and cons of this arrangement?
With the combined financial resources of two buyers, it’s easier to buy. You’ll have better properties within reach than you’d be able to otherwise afford.
Lenders would far prefer to have two mortgagees, and with two buyers, they’re far more likely to pool their resources for a 20 percent down payment.
That 20 percent figure is important. If you’re able to provide a 20 percent down payment, you’ll be able to avoid the added expense of private mortgage insurance. PMI can fluctuate, but it’s typically 0.5 to 1 percent of a home’s value.
As homeowners know, the mortgage payment is just one expense that homeowners are responsible for. When you buy with a friend, you’ll be able to split property taxes, maintenance, repairs, HOA fees, and utilities. Those can really add up.
Lenders will look at the credit scores of both borrowers. If one of you has a significantly lower credit score, that could limit the amount you can borrow.
If your friend falls behind on their payments, their credit score and yours could take a hit even if you’ve been current with your payments.
If one of you decides to move out, the remaining party would need to refinance, which may not be a possibility depending on their financial situation. The party that moves out could stay on the mortgage and rent their space out, but it might be difficult to get a non-resident co-owner to pay their share of expenses indefinitely.
Even though you are splitting the mortgage payments, you and your friend are individually responsible for the entire mortgage, which means that if you apply for another loan, your DTI will appear much higher than it actually is.
Different Types of Co-Ownership
If the distribution of ownership is uneven, you’ll need a tenancy in common agreement. This will establish what percentage of ownership each person has in the property. It’s typically for people who own unequal percentages of the property. There’s some flexibility with this arrangement in that other parties can be added to the agreement later. In a joint tenancy agreement, each party owns an equal percentage of the property and additional parties cannot be included later.
What would happen in the event that one party were to pass away? In a joint tenancy agreement, the surviving owners would inherit the deceased’s share of the property. Tenants in common, on the other hand, don’t have any automatic inheritance rights. It’s a deeply unpleasant topic, but these are the conversations you need to have. Friends and finances are an uncomfortable combination, but getting clear on everything at the outset can head off a lot of problems down the road.