You want to buy a home but can’t afford—or simply don’t want—to do so on your own. So, you may be thinking about buying a home with friends.
On the surface, co-buying a house seems to solve many of the major problems you’re facing. But, as with any big decision, it’s essential to dig deeper so you can make the right choice for you.
Why Buy a House With Friends?
You may be tired of renting, where your hard-earned money doesn’t build wealth in an asset, and you’ve probably heard interest rates are low, making now a potentially good time to buy. In fact, interest rates on mortgages are even lower than they were during the Great Recession that ran from 2007 to 2009. You could save thousands of dollars if you lock in a low rate on a fixed-rate mortgage. In the future, rates, and what you pay in interest over time, could be much higher.
Another good reason is the down payment. Traditionally, buying a home typically requires a 20% down payment, which is often a major hurdle for people early in their careers. Buying with friends can help you clear that hurdle, save on interest and save money another way.
While coughing up the 20% down isn’t absolutely necessary to get a mortgage, if you can’t make the 20% threshold, many mortgages require private mortgage insurance (PMI). The insurance, which protects the mortgage lender if you stop making payments, costs between 0.2% and 2% of the loan amount, which could translate to hundreds of dollars every month.
Pooling money with friends to hit the 20% down payment mark means you can avoid PMI and those potentially steep premiums.
Things Get Complex—Quickly
So far, the case for joint home ownership seems clear and simple. You can buy now while rates are low and avoid PMI. The reality of co-owning real estate is much more complicated, however.
Let’s start with the biggest question. Will you and your friends each own an equal share of the home?
You’ll need an answer before you can choose how you’ll hold the title together. The two most common options are joint tenancy and tenancy in common. Bear in mind that the word “tenancy” here refers to ownership, not renting.
There are several differences between the two ownership types, perhaps the biggest being that joint tenants all own equal shares in the property; tenants in common don’t have to. For example, if you’re buying a home with a friend, and you choose joint tenancy, you each own 50% of it, period. If you choose tenancy in common, one of you could own 75% and the other 25%, if that’s what you’ve agreed to.
Another key difference relates to what happens if one of the property owners dies. Under a joint tenancy, that person’s share goes to the surviving owners. Under a tenancy in common, the deceased person’s share goes to their designated heirs.
The chances that you or one of your friends will die soon may indeed be remote, but it is possible, and it’s important to consider before co-buying a home.
Credit Scores, Chores and Everything in Between
Before you buy, you’ll also want to find out the credit scores of every co-purchaser. Lenders look at them all, not just one. Higher credit scores typically translate into lower interest rates and lower monthly payments.
Next up are questions you’ll need to think about regularly while you co-own the home. What happens if someone doesn’t pay their share of the mortgage on time? Who will pay utilities, which may be higher than you’re used to as a renter? What if one person wants to add a deck or solar panels and the others don’t? What if one friend is determined to adopt a dog and everyone else is a cat person? How will you handle disputes of this kind or any other kind?
The truth is, you won’t be able to think of every single potential eventuality that could come up. Still, doing your best to think about as many as possible now could save you a lot of conflict later. Just be sure to document what you agree to along with the consequences for anyone who breaks the accord. It may seem like you’re going overboard by putting your agreements in writing (you’re all friends, right?), but doing so protects everyone.
What’s Your Exit Strategy?
Chances are you don’t plan to live with your friends for life, so before you even co-buy the house, you’ll need to think about what you’ll do when it comes time to sell it.
That means more important questions to consider, including how long you’ll live together. In general, buying makes more sense than renting if you plan to stay put for at least five years, in part because of all the fees you pay when you buy or sell a home, such as real estate agent commissions and moving costs.
You and your co-owners might all be ready to sell at once, in which case you’ll need to figure out how to split the profit, or loss, you’ve made on the home. Or you might want to stay put while others decide to leave. That might seem easier, but it means you’ll have to refinance the mortgage, which comes with—you guessed it—fees. And you’ll need to meet the requirements for the new loan on your own.
Or you and your friends might decide to keep the home as an investment and rent it out, meaning now you share all the responsibilities of being a landlord.
Thinking all this through will take time. If you’re feeling overwhelmed, take a few small steps. You could rent a place with the people you’re considering buying with, giving you a chance to iron out at least some of the wrinkles you’ll encounter while owning together. You can also research programs to help first-time buyers afford homes, including loans that don’t require 20% down to avoid PMI.
Buying a home is a big deal, not an impulse buy. These steps will get you closer to your goal and help ensure you’re happy owning a home, from the day you move in to the day you move out.
Elizabeth Whalen is a freelance writer based in Seattle. She loves writing about business, financial services and sustainability.
Remember, a critical first step to purchasing a home is saving for the down payment. If you haven’t already, consider setting aside funds in a separate savings account. Opening a high yield savings account is a smart option to help you reach your savings goals along your home purchasing journey.