In the past couple of years, Millennials have gone from being gun-shy about buying homes to becoming the largest segment of home purchasers. A recent Zillow poll showed that half of all home buyers are under the age of 36, which puts them solidly in the Millennial age bracket.
Many of these buyers fit into the traditional home-buying bracket as married couples. But a full third of the buyers surveyed were either unmarried partners or single people. And in some cases, these individuals may be purchasing a home with friends or family members.
There are plenty of good reasons to buy a home with someone to whom you aren’t married. You might, for instance, be unmarried partners. Even though you live in a marriage-like relationship, the considerations were laying out here will still apply to you. Or maybe you want to buy a home in a part of the city you like but are single and can’t afford it on your own income. In that case, buying a home with a close friend can be cheaper than renting as roommates.
Buying a home with someone else can be a great option for many reasons. But it can also come with some potentially huge personal and financial pitfalls. Understanding these issues ahead of time will ensure that your finances--and your relationships with your co-owners--come through the process intact.
1. Be Transparent About Finances
How much do you have to put towards a down payment? What about your potential co-owner? And what do your credit scores look like? You’ll need to come clean about your personal financial information if you’re going to buy a home together. Trust me, it’ll all come out in the paperwork, anyway.
Another consideration: potential liens. Unpaid loans can actually be attached as liens to your mortgage in some cases. This can make it difficult to sell your home if it comes to that. So be sure you know about all of your own and your co-owners potential financial obligations well before you think about buying a home together.
Besides being transparent about your financial history, though, you need to be transparent about your ability to pay for a mortgage. Often times mortgage lenders will offer you a much larger mortgage than you can truly handle. Sure, you could devote a third of your income to your mortgage. But does that leave you enough financial wiggle room to live your life?
As you’re considering buying a home together, do the math on what you, personally, can afford. And be sure that the dollar amount you come up with is a comfortable amount, not a reached amount. Then ask your co-owners to do the same thing. Together, you can work through the numbers to come up with the amount of houses you can afford. And that way no one gets in way over their head.
2. Know Everyone is Responsible for the Mortgage
On a similar note, you should understand going in that everyone involved in the transaction will be on the hook for the entire mortgage. Even if you split ownership 60/40 or in any other way, the lender will come after you to cough up the mortgage payment in full. And if that mortgage payment doesn’t get paid on time, the resulting late payment will ding your credit score, too.
This is similar to married couples. Even if one spouse loses their income, on which the original mortgage loan was based, the couple is still responsible for the full mortgage payment.
All this means that you need to be very careful about how big a mortgage you take out. Signing on to a $1,000 per month mortgage might seem great if you’re only supposed to pay $250 of that. But what if your other co-owners check out and stop paying their portion of the bills?
You’ll either have to pick up the slack, buy them out of their portion of the mortgage, or sell the property to get out from under the obligation. None of those is a great option at the last minute, so be sure you’re prepared.
3. Choose the Right Legal Option for Co-Ownership
This is where things can get a little confusing. But I would recommend working with a lawyer if you decide to co-own a home with friends or family members. There are a few different ways to set up the situation. Here’s a rundown of each, based on information from the American Bar Association:
- Tenancy in Common: With this type of co-ownership, you can split the ownership of the property along whatever lines make the most sense. If one party puts down most of the down payment, they could own 70% of the property while the other party owns 30%. It’s up to you to decide the split that makes sense. But if one person passes away, their portion doesn’t automatically pass to the other party. Instead, it goes into their estate and is dealt with by their heirs as part of their property.
- Joint Tenancy with Rights of Survivorship: With this option, you have to split the property equally. But when one party passes away, the other party or parties automatically inherit their share of the property.
Typically joint tenancy with rights of survivorship is best for committed couples who cannot marry or choose not to for whatever reason. This is closest to the way that married couples experience homeownership legally.
But if you’re purchasing with two or three roommates, tenancy in common may be the better option. With that said, part of the purchasing process should be ensuring that all parties have an appropriate will that deals with what happens to the property if they pass away.
This may not make the process easy, exactly, but it will streamline things and ensure that everyone knows what to expect should the worst happen.
Again, it’s best to talk about these matters with a lawyer. They can get pretty tricky, and the legal language must be specific. So talk to your lawyer about what you think the arrangement should look like, and they’ll translate your desires into appropriate legal language.
4. Splitting Expenses is a Perk but Also a Potential Headache
It may seem like splitting expenses is one of the best things about buying a home with others. And, sure, it might be. You could get into a nicer home or better neighborhood while sticking to your budget. But splitting expenses can also be a headache.
Splitting the mortgage is probably the easiest thing to decide. If you have a $1,000 mortgage payment and 60/40 ownership, one person can pay $600 and the other can pay $400. Not too bad.
But what about other expenses like utilities and ongoing maintenance? Should you split those down the middle since you’re both living in the home? Or should the owner with the larger share pay for more maintenance?
These arrangements don’t have to be set in stone forever. But it helps to get them down in writing before you buy the home. Setting out your expectations can give you something to hold one another to. And that can keep from busted budgets and hurt feelings down the road.
5. Talk Through Non-Mortgage Expenses and Responsibilities, Too
Of course, finances are only half the battle when it comes to buying a home. What about the stuff that you actually have to do to be a homeowner? Unless you’re planning to hire a cleaning service, lawn service, and general maintenance man, homeownership-related tasks will come up frequently. (Trust me on this one.)
It’s easy to assume that everyone will pitch in equally and clean up their own messes. But trust me again when I say that this isn’t always the case. It takes time for married couples to settle into the responsibilities of running a household. And it’s no different when you live with other adults to whom you aren’t married.
My husband and I have had roommates more often than not in our decade of marriage. And what I’ve found is that the more upfront we are about our expectations, the better off we are. You cannot just assume that other people are going to adult well or live up to your personal standards of cleanliness. You have to settle on expectations early on.
When you’re the homeowner with a tenant, that’s pretty easy. You can just say, Hey, you’re moving into our spare room for a pretty low rental rate. Here’s what we expect you to do while you live here. But if you’re a co-owner, that’s not as easy. Remember, it’s a reciprocal relationship and there needs to be given and taken. But it’s easier to give and take if you do it before you jump into homeownership.
6. Selling Down the Road Can Be Tricky
Finally, be sure you have thought through what selling the home might look like in the future. Say one co-owner gets married and wants to move out. How does that work? Do you have the first option to buy them out of their portion of the home? Or should you just sell the home altogether?
Situations that end on a sour note can be particularly problematic. So be sure you have an out to sell the property should you end up needing to do so.
Purchasing a home with a friend or family member isn’t necessarily a bad idea. But it’s a little like walking into a new marriage. It’s a big commitment, both personally and financially. And unless you’ve thought it through ahead of time, you’re likely to run into some serious trouble. So be sure to think through all of the angles before you sign those mortgage papers!