Co-Buying A Home With Friends: What You Need To Know

Thinking about buying a house? For many, the biggest challenge is affordability. In fact, around 54% of prospective homebuyers cite a lack of funds as their primary barrier to purchasing a home. With rising property prices, affordability remains a significant concern for a majority of prospective home buyers. So, what can you do if you can’t afford to buy a house on your own? One option worth considering is co-buying a home with friends.

Believe it or not, co-buying is more common than you might think. According to JW Surety Bonds, 15% of Americans have purchased a home with someone other than a romantic partner. Let’s explore what co-buying is, how it differs from other arrangements, and what you need to know before taking this step.

What Is Co-Buying?

Co-buying a home means purchasing a property with one or more people, where everyone involved has an equal ownership stake and is equally responsible for the mortgage. This is different from cosigning, where someone adds their name to the mortgage to help the borrower qualify, but may not hold any ownership interest in the property. Co-buyers are both owners and borrowers, which means they share the benefits, responsibilities, and risks of homeownership equally.

Key Considerations Before Co-Buying a Home

Before you jump into buying a home with a friend, there are some important factors to think about:

The Depth of Your Relationship

• Do you truly trust your friend, and do you have a solid understanding of each other’s approach to finances, goals, and lifestyle? Co-buying a home is a significant financial commitment that will bind your futures together, so it’s essential to make sure you’re on the same page.

Entering a Legal Agreement

• When you co-buy a home, you’re not just making a financial commitment with your friend, but you’re also entering into a legally binding agreement with the mortgage lender. Make sure you’re both ready for the long-term commitment that comes with a 30-year mortgage.

Agreeing on Key Details

• You’ll need to agree on crucial aspects such as the location, price, and type of property you want to buy. This requires honest conversations about your preferences, goals, and financial situation.

Have a Written Agreement

• It’s vital to treat this as a business arrangement. Draft a detailed co-ownership agreement that outlines the terms of the partnership, including how costs will be shared, how decisions will be made, and what happens if one party wants to sell or move out. Consulting an attorney is a smart move to help navigate the legalities and protect everyone’s interests.

Understand Each Other’s Financial Situation

• Make sure you know where your co-buyer stands financially. Do they have good credit? Are they reliable with their finances? If one person has a poor credit score, it could affect your ability to qualify for a mortgage or lead to higher interest rates. Essentially, you’re not just investing in a property; you’re investing in the other person, so it’s important to do your due diligence.

Pros of Co-Buying a Home

Multiple Income Streams

• Pooling together multiple incomes can make it easier to qualify for a mortgage. It may also allow you to make a larger down payment, which can help you get better loan terms.

Build Equity Sooner

• Co-buying can make it possible to purchase a home at a younger age than you might have been able to on your own. The sooner you buy, the sooner you can start building equity and growing your investment.

Shared Homeownership Costs

• By splitting ongoing costs like mortgage payments, utilities, insurance, and maintenance, co-owners can ease the financial burden of homeownership. This makes it more affordable to own a home, especially in high-cost areas.

Cons of Co-Buying a Home

Stress and Responsibility

• Owning a home comes with responsibilities such as repairs, upkeep, and maintenance. Managing these responsibilities can be stressful, especially when multiple people are involved in decision-making.

Tied Finances

• Your finances will be intertwined with your co-buyer’s, much like in a marriage. If one person struggles financially, it could affect the other’s credit and ability to meet mortgage obligations.

Complicated Exit Strategy

• If one person wants to sell their share of the home, it can create challenges. You need to plan ahead for how to handle situations where one party wishes to exit the agreement, and ensure the co-ownership agreement covers this.

Double the Paperwork

• Co-buying involves extra paperwork, from drafting co-ownership agreements to making sure both parties are listed correctly on all legal documents. It’s a bit more complicated than buying a home on your own, but with careful planning, it can be managed.

How the Co-Buying Process Works

If you and your friend can navigate these considerations, the process of buying a home together is similar to purchasing a home on your own. Here’s a basic rundown:

Get Pre-Approved for a Mortgage

• Start by getting pre-approved, so you know how much you can afford. This step will give you a clear picture of your combined buying power.

Find a Real Estate Agent

• Working with a real estate agent who understands your situation can make the search easier. They can help you find properties that suit your combined needs and budget.

Go House Hunting

• Search for homes that meet your criteria, and be ready to compromise. Finding a property that fits both your needs might require flexibility.

Make an Offer and Get an Accepted Contract

• Once you’ve found a home, make an offer. If the seller accepts, you’ll move forward with a contract and begin the closing process.

Close on the Home

• At closing, you’ll sign all the necessary paperwork, pay the down payment and closing costs, and receive the keys to your new home.

Conclusion

Co-buying a home with friends can be a practical way to overcome the affordability barrier to homeownership. It allows you to pool resources, share costs, and enter the housing market sooner. However, it’s not without challenges. Successful co-buying requires clear communication, trust, and careful planning, as well as a solid legal agreement that protects everyone’s interests.

If you’re thinking about co-buying a home, take the time to weigh the pros and cons, have honest discussions with your co-buyer, and seek legal advice to ensure a smooth and successful partnership. With the right preparation, co-buying can be a rewarding way to achieve your dream of homeownership.