Understand the Pros and Cons Before You Purchase a Home with a Friend
Renting a home or apartment with a friend isn’t uncommon, and it can be a great way to save money, especially for young people who are just starting out on their own. Having a roommate also gives you the chance to enjoy the company of a friend. Sharing living space among friends is often a short-term arrangement, until one or both parties gets married or decides it’s time to live alone or move on.
You may, however, be looking for more of a long-term arrangement and would prefer to invest your money in something that builds value, like real estate, rather than renting. In this case, you might consider purchasing a home with a friend (or friends).
Splitting the cost of a home with another party (or parties) sounds like a great idea, and it may be a great investment. After all, it can reduce your financial burden by at least 50 percent, while still allowing you to build equity. But is it worth it?
Before you commit to buying a property with another person, there are some things for you to consider. Let’s take a look at the pros and cons.
Pros Of Buying A House With Friends
Get qualified for a home loan — Mortgage rates have been near historic lows lately, but that doesn’t mean getting qualified for a home loan is any easier. In fact, many lenders are making it more difficult for individuals to get qualified for a home mortgage, even for someone with good credit. Purchasing a home with another person may make it easier to get qualified, as the lender will take both incomes and credit scores into account. Speak to a professional mortgage lender, like the team at PrimeLending, for more information on getting prequalified.
Reduce your financial responsibility — If you’re considering purchasing a home with friends, you’re more than likely planning to split the costs, including down payment, closing costs, mortgage payments, insurance, utilities and maintenance costs. Making the decision to purchase a home may be much more appealing to you if there is less of a financial investment involved.
All the benefits, half the expense — Not only will you be reducing your financial risk, but you’ll also have another individual to help out with unforeseen expenses, such as fixing a weather-damaged roof, repairing broken pipes or replacing a refrigerator that’s no longer running. All the while, you will receive the benefits of purchasing a new home, such as the opportunity to build equity and receive tax benefits.
Cons Of Buying A House With Friends
Your Friend’s Finances Influence Your Mortgage Rate — The mortgage rate offered by your lending company depends not only on your personal credit and income, but also on the other party’s credit and income. While this can be beneficial and could help you get a lower interest rate, it may also limit the types of mortgages you can qualify for and could result in a higher interest rate and therefore larger mortgage payments.
Your Credit is On the Line — With two names on a mortgage, both parties are responsible for paying the bills. If your friend falls on hard times and is unable to pay his or her share of the mortgage, you are still obligated to ensure the entire payment is made. If you are unable to cover your friend’s portion of the bills, your credit will suffer too.
Getting Out of a Joint Mortgage Isn’t Always Easy — What’s the plan if one of you decides it’s time to get out of the arrangement, perhaps due to a job change or marriage? There are two ways to get one person’s name off the mortgage, and neither is easy or cheap: sell or refinance. If you are unable to sell and the other party is unable to qualify for a home loan on his or her own, you may be stuck.
Disagreements Will Happen — In a perfect world, you and your friend will always get along and agree on all decisions regarding your shared home. However, in reality, disagreements are bound to happen. Whether you are renting or have purchased a home with a friend, issues will arise between roommates, and in some cases, those issues may damage the friendship irreparably. As we have pointed out, it’s much easier to walk away from a rental agreement than it is to end a relationship when you co-own a house.
Steps To Take Before You Buy
If you are going to buy a home with a friend or friends, be smart and be proactive.
Plan Ahead — Think through all the possible scenarios before you sign on the dotted line. What’s the plan if one of you can no longer live in the house? What will you do if one party has an unexpected life event, like losing a job or medical expenses, and is unable to cover his or her costs? Who will pay which bills and when? Because you are entering into a financial transaction together, it’s fair and reasonable to know how all parties would handle these types of challenges.
Agree on Big and Little Things — Buying a home with friends means shared responsibilities, so make sure you are on the same page with your friend about every decision and expectation involving the home, including potential repairs, renovations and expenses. Go ahead come to an agreement on things you may take for granted. What may seem like no big deal to you, may be a big concern to someone else. Be sure and cover topics like smoking, pets, guests, and even housekeeping standards.
Discuss Finances — Have an honest conversation with each other about your individual financial situations, including credit, income, debt and payment history. Expenses will come up. Does your friend have savings and put aside money to cover the unexpected, or does he or she barely living within their means. This can be an uncomfortable conversation, but it is necessary to help you determine if purchasing a home with your friend is worth the risk.
Remember, just because you are best friends with lots of interests in common, that doesn’t mean you will be happy co-owners of a home. Don’t rush the decision-making process. Take your time to do your research on the other person and consider hiring an attorney to create a cohabitation agreement outlining important details, such as type of ownership, how to dissolve the agreement and how expenses will be divided.
There are many reasons buying a home with friends can be beneficial for all parties involved, but keep in mind that unforeseen issues will no doubt arise, and may cause conflict in your relationship. Are you ready to risk your friendship for this endeavor?
Are you ready to take the next step and purchase a home with your friend? Contact PrimeLending today. A lending expert near you will be happy to help you talk through the pros and cons and help you get started with the prequalification process.