How to Buy a House With a Friend

Having a place of your own that creates equity and even potentially generational wealth is extremely attractive to many people. However, not everyone can afford to buy a home on their own.

Whether it’s inflation, a lack of savings, or the desire for co-operative living and sharing costs, new homeowners – especially Millennials and younger– are exploring the option of buying a house with a friend.

But, how do you buy a house with a friend? And is it a good idea?

How Do You Buy a House With a Friend?

Buying a house with a friend is similar to buying a house on your own or with a spouse. But in this case, there will be co-owners who share the mortgage payment.

This can be a great option if you are wanting to buy a new home for the first time. Buying a home with a friend can also open up the house to become an investment property which will provide you with a steady source of income.

The process of purchasing a home can be time-consuming and difficult. But knowing the exact steps on what you need to do before you and your friend become homebuyers will help make the process easier and less stressful.

Get Clear On Finances

The very first thing you will want to do is assess your finances. Both parties should get clear on their finances before the homebuying process begins.

Credit Scores

You and your friend will need to know each other’s credit scores to ensure that you will be able to buy a home with a good interest rate. Before you move on to a mortgage application you’ll want to make sure that you and your friend are comfortable sharing this kind of information.
Debt-to-Income Ratio (DTI) – Find out what each of your DTI is before moving forward. You can find this by dividing your monthly debt payments by your gross monthly income. Lenders will use your DTI to determine if you are able to pay back the money you are borrowing. The ideal DTI is 36% and no higher than 43%.[1]

Job Security

Before you buy a home with someone else you will want to ensure that you both have good job security. This is essential when you are choosing a home and how much each of you will be spending on the mortgage. Knowing that you and your friend both have good job security will make entering into this deal a lot less stressful for both of you.

Splitting Costs

You and your friend will want to determine how you split the cost of the home. This will include closing costs, downpayment, property taxes, and mortgages. Deciding this in advance will help make the process easier when it comes to paying for your new home.

Clear Up Any Legal Matters

Before you begin the home-buying process, make sure to clear up any legal troubles either of you two may be having. Legal problems such as a lawsuit, possible bankruptcy, or troubles with the law that might make someone face jail time can hinder the sale of a new home. These kinds of problems may cause lenders to back out of the sale of a new home.

You’ll also want to consider whether there are any adult dependents or custody battles happening for children before you start looking for a new home. Family issues may cause strain on the buying process for both of you. Clearing these issues ahead of time will make the process much smoother.

Determine Your List of Must-Haves (and Be Ready to Cooperate)

Some people may prefer a single-family home while others might think that’s living too close to each other. Writing out a list of must-haves for your home will help you both narrow down what is important to each of you before you begin looking for a home.

A lot of the time there will need to be some bend on one or both parties’ ends to get into a home that works great for both of you. Keep an open mind when buying a home with someone else.

Decide on Joint Tenancy or Tenancy in Common

Co-ownership of a home will fall into two types of property ownership categories. These are tenancy in common and joint tenancy.

Joint tenancy allows each homeowner to have equal property shares. Commonly used for married couples, this type of ownership agreement will allow the shares of one owner to be passed to the other in the event of death.

When a home is owned by two or more people, each tenant will receive a percentage of the house depending on how much equity they have contributed to the home. When one of these owners passes away, the percentage owned will pass to their heirs. Tenancy in common is an ownership agreement that will allow the co-owners to divide their property shares unequally or equally and leave those shares to one individual’s heirs in the event of death.

Start Your House Hunt

Once you have discussed how the two of you will be going about the home-buying process, gotten legal matters cleared up, and talked about your ideal home it’s time to start hunting for your new home.

It is critical to search for homes in the areas you are most interested in living. This will help you and your friend know that you are buying a home in your preferred area. Once you have locked down what area you want to live in, you can start looking for homes that have the features you both want. Keep communication completely open during this time and voice concerns to your friend if any arise.

Should You Buy a House With a Friend?

Buying a home with a friend may sound like a good idea. But it’s important to weigh the pros and cons before you enter into homeownership with another person.

Pros of Buying a House With a Friend

Increase Purchasing Power – When you take a joint mortgage out, lenders will usually consider your and your friend’s combined income. This can help with making payments and paying for the downpayment and closing costs.

• Easier To Get A Mortgage. When more than one person buys a home together it will increase the likelihood of getting a good mortgage. This is because more than one person paying for a home together will likely be able to put down a larger down payment.
• Split The Costs – There is more to homeownership than just the monthly payment. Insurance, property taxes and more come along with owning a home. Splitting the costs of these with a friend will help both of you pay less down.
• Strengthen Your Friendship – Buying a home with a friend is a great way to strengthen the friendship between the two of you. The added responsibility of being homeowners will create a deeper connection.

Cons of Buying a House With a Friend

• Credit Scores Matter and Can Be Impacted – Typically lenders will use the lower credit score to base your mortgage off of. That means that if your friend has a low credit score your monthly payments will be higher. Your credit score will also be impacted if your friend falls behind on their part of the payment.
• It’s Difficult To Move Out – If one of you decides that you want to move out the process can be very difficult. This is because when their name is taken off the mortgage it will require you to have to buy them out of their portion of the home and refinance the mortgage.
• It Can Be Stressful – If you enter into homeownership with someone you don’t know that well or the relationship isn’t strong, it can be a very stressful time for all involved.

Questions to Ask Before Buying a House With a Friend

You should always ask questions to the other person before you begin the home-buying process. These questions can include:

• How long do you want to live in the home?
• What happens if you want to get married?
• What happens if someone wants to sell or move?
• Is there a chance that children or adult children will need to live here?