Buying a house with friends is doable as long as everyone understands their responsibilities and has the same goals.
When most people think of buying a house, it’s usually with a partner or spouse. But co-ownership is possible with anyone, whether it’s a partner, family member or a group of friends.
Pooling your resources can not only significantly boost your buying power, it can make homeownership much more affordable than if you were to buy a house alone.
“Today’s homebuying market and high housing costs are often daunting enough that many prospective homebuyers consider buying a home with a non-relative roommate,” says Bob Driscoll, senior vice president and director of residential lending for Massachusetts-based Rockland Trust Bank.
However, a home purchase is a big financial commitment, and there are some risks when buying a house with friends.
- Is buying a house with friends a good idea?
- Pros and cons of buying a house with friends.
- How to buy a house with friends.
- Buying a house with friends vs. as a married couple.
Is Buying a House With Friends a Good Idea?
Each person has their own level of risk tolerance, says Driscoll, and it’s important to understand what you’re getting into beforehand. “The complications and risks that come with this decision may outweigh the good that can come from it,” he adds.
Whether or not buying a house with friends is a good idea also depends on your goals and financial situation.
“Buying a house with friends can be a good idea if you have a trusting and compatible relationship and share similar financial goals with the objective to build equity together, compounded with potential tax savings,” says Nicolas Janovsky, global real estate advisor at Premier Sotheby’s International Realty in Tampa, Florida.
Pros and Cons of Buying a House With Friends
Here are several pros and cons to consider:
Pros of Buying a House With Friends
- You can buy more house: Because you and your friends are dividing the monthly mortgage payment, you may be able to afford a larger home in a better area than if you were to purchase it alone. “This method can be very effective, especially in that it can put you in a position to qualify for a larger loan, basically helping you afford more square footage,” says Rebecca Awram, mortgage advisor at Seniors’ Lending Centre in British Columbia, Canada. “Two incomes and two down payments combined go a lot further than one.”
- It’s easier to qualify for a mortgage: When you apply for a home loan, the mortgage lender will look at your and your friends’ credit scores and income to determine whether you qualify for a loan. You could also qualify for a better interest rate, which can lower your monthly mortgage payment.
- You can build equity sooner: Renting provides more flexibility, but it’s an unrecoverable cost. Owning a home allows you to build equity and accumulate wealth.
- You can avoid paying mortgage insurance: If you and your friends make at least a 20% down payment, you can avoid paying mortgage insurance. Otherwise, you could pay from 0.5% to 2% of your loan amount for your annual mortgage insurance premium. For a $250,000 mortgage, that could be $1,250 to $5,000 per year or $100 to $420 per month.
- You can save money: Not only will you save money by splitting the mortgage payment, but you’ll also save on other expenses. “You can split maintenance costs and enjoy shared living spaces and might enjoy additional tax savings, such as write-offs for mortgage interest and home office usage,” Janovsky says.
Cons of Buying a House With Friends
- Your friends’ credit scores can negatively impact your mortgage: If one friend’s credit score is much lower than everyone else’s, that could mean a higher mortgage payment.
- It can be difficult to back out: “You’re going to be tied to them financially in a way that’s very difficult to undo,” Awram says. “While buying with a partner means you can pool your funds and share the cost, it’s also important to consider what will happen if one partner wants out or struggles with their repayments.” If this happens, you may be forced to sell the property to pay them back for their share of the equity.
- It could hurt your relationships: You could encounter disagreements over property decisions, differing financial capabilities and the possibility of straining your friendship, Janovsky says.
- It can cause financial strain: All borrowers are equally responsible for the mortgage. If one friend can’t pay their share of the mortgage, then the others must make sure the payment is met. “Nonpayment of one homeowner is directly reflected onto the other homeowner, affecting their credit ratings and ability to apply for future loans,” says Driscoll. “Both borrowers are liable for the mortgage at all times, regardless of personal circumstances.”
How To Buy a House With Friends
You’ll follow a similar homebuying process as you would if you bought a home on your own, but the biggest difference is how you’ll split ownership and hold title to the property. Here are some important topics of conversation to have with your friends before you buy a house together.
1. Pick the right friends. “This type of arrangement can theoretically work with any friend as long as this friend agrees to the terms of shared ownership and qualifies/can afford a mortgage,” says Driscoll. But there are other factors to consider, he adds, including whether you’ve lived together before, how confident you are in each other’s finances and more.
Janovsky recommends finding someone who shares your financial values, has a stable income and has a similar vision for the property. “Open and honest communication is vital to ensure everyone’s needs and expectations are met,” he says.
2. Discuss ownership terms. There are several ways to divide ownership of the property. The two main types of ownership are joint tenancy and a tenancy in common.
A joint tenancy gives each owner equal shares and responsibilities to the property. When one owner dies, their shares are automatically transferred to the surviving owners. A tenancy in common is another form of fractional ownership, equal or unequal, but when one owner dies, their shares are passed down to their heirs.
3. Divide responsibilities. One person can’t take on all the responsibilities that come with homeownership. Split responsibilities among each owner and financial contributions when it comes to utilities, repairs, maintenance and more.
4. Put everything in writing. Meet with an attorney and put together a cohabitation agreement. This type of agreement should cover property rights and financial obligations that come with living with another person.
“It’s important to consult with a lawyer or real estate professional to determine the best approach for your specific situation and to draft a legally binding agreement that outlines ownership percentages, responsibilities and dispute resolution procedures,” Janovsky says.
Buying a House With Friends vs. as a Married Couple
One benefit of marriage is the statutory legal protections that come with it. These laws protect the surviving spouse from losing their home and specify how property is to be divided when a couple gets a divorce.
These don’t apply to other relationships, but you and your friends can put together a legally binding contract with similar provisions. “Remember, it’s crucial to consult with professionals like real estate agents, lawyers and financial advisors who specialize in shared ownership arrangements,” Janovsky says. “They can provide personalized guidance based on your specific circumstances.”