Should you buy a home with friends?

By Kellye Guinan

There’s a risk that comes with buying a home with anybody, but friends make it even more complicated. Going in on a mortgage could make it easier to qualify and help make everyday expenses more affordable, but you risk straining your relationship and harming your finances if you don’t carefully consider your boundaries.

Can you buy a house with a friend?

Yes, you can buy a house with a friend — friends, relatives and business partners are all eligible to be listed on a home loan title. There are a variety of ways to title your home to legally account for multiple people.

Essentially, it’s no different from buying a home with a spouse. There might be slightly more risk of someone’s financial or life situation changing, but if you have a solid friendship, buying a home together can be a valid way to build equity.

Is buying a house with a friend a good idea?

It depends. There are a range of benefits to buying a home with a friend, but there are also some significant drawbacks:

Pros

• It’s more affordable to buy a home when you have someone to split expenses with. You will be sharing responsibility for the mortgage, you’ll also have someone to help with bills, repairs, and renovation costs.

• A friend can help you make a larger down payment than you might be able to afford on your own. With a down payment of at least 20 percent, you’ll also avoid paying for private mortgage insurance (PMI).

• You might find it easier to qualify for a mortgage with a co-borrower. Provided you both have a regular source of income, a low debt-to-income (DTI) ratio, and good credit, you could get a favorable interest rate and a larger loan.

• You’ll also still be able to qualify for an FHA loan with a friend. FHA loans are designed to help reduce upfront costs for a first home purchase.

• Together, you and your friend can start to build equity and wealth — something you wouldn’t be able to do if you were still renting.

Cons

• Everyone’s finances matter when you apply for a mortgage. So, while you can benefit if each borrower has good credit, one person’s bad credit or insufficient income limits your ability to qualify for a mortgage.

• Moving out or selling a property might be difficult because you’re both on the title and responsible for the mortgage. You’ll need to work out a formal agreement before you buy. When you and your friend are clear about expectations, you’ll limit future conflict.

• Your DTI ratio appears high to potential lenders becausethe full amount of the mortgage is listed on your credit report, even though you’re sharing it with someone else. With a higher DTI ratio, a car loan, credit card or another loan might be more difficult to qualify for.

• If your friend loses their job or cannot help with the mortgage, the payments will be fully on your shoulders. This could put your finances at risk — and if it lasts, you might be at risk of default and foreclosure.

• Like any roommate situation, you’ll inevitably share financial and daily responsibilities. This could be a benefit, but it can also lead to conflict if dishes aren’t done, or you have differing ideas on how much you should spend on regular home maintenance.

How to buy a house with a friend

Purchasing a property with a friend is similar to buying a home in general, but there are some specifics you should keep in mind to prevent misunderstandings and problems.

1. Consider everything — from personality to finances

There’s no reason to be shy about your finances when you’re planning on buying a home together. Like any partnership, you need to be frank about how much you can afford and the credit history you have. Mortgage lenders consider each applicant, so if one person has a lot of debt, a lower income, or poor credit, you’re less likely to be approved for a loan.

You’re friends, so personality might seem like a given, but as in any relationship, close quarters can cause friction. If you aren’t clear on expectations for your shared space, you could run into conflict. It might make sense to live together for a year before buying a property. Getting to know each other’s habits firsthand could prevent emotional and financial strain down the road. Plus, you’ll have extra time to save up for the down payment, reducing the overall amount you’ll need to borrow.

2. Know the type of property you want

You aren’t limited to single-family homes with a shared living space. If you and your friend want to go in on an investment property, you can. If you do want to live together, discuss if you’d like to rent out a room or buy a property with a separate rental suite.

Setting clear expectations on the type of property you’re both looking for will help ensure your ideas align. Work in your future plans, too: A home is an investment even if it’s your primary residence. So have a vague idea of what you both want your next five, 10 or 30 years to look like when buying a home together.

3. Work with a lawyer from the start

A formal agreement is a must when buying a home with a friend. Meet with an attorney to draft a contract that covers a variety of potential situations, including what happens if you want to buy out your friend.

Your life is bound to change, so consider how you and your friend can opt-out of the arrangement and know what it will take to refinance. Having this settled before you buy will save you both potential headaches later.

4. Determine how the mortgage will be paid

Not every mortgage has to be split 50/50 — in fact, it might not be realistic if one person has majority ownership of the property or you’re planning on going in with multiple friends. Discuss how you’ll be splitting the mortgage and who will be in charge of making payments.

No matter what course you decide, have it written into the formal agreement. This keeps everything above board and honest. If a conflict does arise or a change is needed, this document will be extremely important.

5. Discuss how to split expenses and daily tasks

Owning a home means paying for homeowners insurance, utility bills, maintenance, and repairs, alongside any renovations you or your friend want to make. It also means chores and taking care of the lawn or landscaping.

Whether you take care of these yourself or contract them out, you’ll want to be clear on how to handle these daily parts of life before moving in. They’re not as big-picture as long-term finances, but they’ll be at the forefront of your life and could be a major source of disagreement if you don’t set boundaries.

This article is also posted on Bankrate here.