Buying A House With A Friend: Pros, Cons And How To Get Started

Buying a house with friends may be something worth considering if you’re looking to achieve homeownership at a lower cost than what you’d pay on your own. However, there are also a few drawbacks to keep in mind before purchasing property with your friends.

Can You Buy A House With A Friend?

Yes. There are many ways to have ownership interest in a property, and these include options that allow any number of people to partner when purchasing a home. As long as all the home buyers can afford the mortgage and meet the lender requirements, you and your friend – or friends – may have the opportunity to buy a house together.

Pros And Cons Of Buying A House With A Friend

Purchasing a house with friends has its pros and cons. While there are plenty of reasons buying a house with the help of a friend or two is a great idea, it’s best to think carefully about the possible consequences and fallout of making such a big commitment.

Here’s how the benefits and drawbacks shake out:

Pros

• You can boost your purchasing power. By pooling your resources, you’ll probably be able to afford a better house in a better area than you would if you tried to purchase it alone.
• It can be easier to get a mortgage. The amount you can afford for a down payment will likely increase with your friend’s help. It can also be easier to meet credit score requirements if you have two or more mortgagees, since many mortgage lenders will average your ratings and look at combined income (assuming all parties have good credit).
• You may qualify for a better interest rate. It’s possible for you and your friend to qualify for a better mortgage rate together than you would separately.
• You can make a higher down payment. Splitting down payment costs means you’ll be more likely to afford at least 20% of your home cost upfront. If you can manage that, you won’t have to worry about private mortgage insurance (PMI).
• You can split costs. Home buying can be a daunting process, especially if you’re just at the beginning of your career. Partnering with friends can slash many first-time home buyer expenses, including utilities, repair costs and mortgage payments.
• You can build equity together. If your only other option is renting, buying a home with a friend can be a great way to start building home equity rather than making monthly rental payments that don’t add value to an asset you own.
• It can help you get your first home or start investing. Sharing costs with someone else is how many people get their first home or get into real estate investing. Choosing a trusted friend or two to partner with can be a great way to get a head start when you’re early in your career.
• You can benefit from the company of a friend. While this is true for renting and roommates as well, you might be at a point in life where you’re ready to own a home or move to a new place but don’t want to do it alone.

Cons

• Your friend’s credit score can negatively affect your mortgage terms. Even if your score is high, your interest rate, monthly payments and other loan terms may not be as favorable if your friend has credit problems before you purchase your home.
• Your friend’s actions can impact your credit score. If your friend falls behind on their half of the mortgage payments, your credit score may suffer along with theirs, even if you’ve been on top of your share all along.
• Your debt-to-income ratio (DTI) might be affected. Even though you split your mortgage payments with your friend, you’re both technically still responsible for the entire mortgage individually. This means that your DTI can look a lot higher if you apply for other loans or lines of credit.
• It’s hard for one person to move out. Since you and your friend are both on the mortgage, you'll need to go through a mortgage refinance to get the house under one of your names. Unless you’re in a good place financially, you might not be able to take on the costs of homeownership yourself.
• It can be hard to work out the fine print. There’s a lot to think about when it comes to owning property, including how shares will be divided and how to handle survivorship and inheritance issues. These can be huge, heavy discussions to have.
• Your relationship might suffer. If you decide to buy a house with someone, chances are that you have a high level of respect and trust for that person. Even so, owning a home together can easily change a relationship, and new responsibilities and challenges might cause stress and disagreements. Before buying a house together, think about whether owning a home is worth the potential risk of damaging your friendship.

How To Buy A House With A Friend: 5 Helpful Tips

Need help getting started? Here’s what you’ll need to consider before getting into the standard home buying process.

1. Choose Your Partner Wisely

Before anything else, your top priority should be making sure you have the right partner to purchase a house with. Sorting through priorities and motives when making such a big commitment can be overwhelming, but you’ll need to ask yourself – and your friend or friends – some direct questions before deciding to purchase together.

Here are just a few to get started:

• Are you in a stable financial situation?
• Can you make good decisions regarding your credit?
• Do we want the same things in a house?
• How long do you plan on living in the house?
• Do you have a stable job?
• Is either of us in or likely to enter a long-term relationship?

2. Figure Out How To Split Ownership

Ownership terms are often expressed in a way that assumes a married partnership between homeowners, but if you’re buying a house with a friend, you might need to dig a bit deeper to understand how various forms of co-tenancy will function in your specific situation.

There are two main types of ownership to consider:

• Joint tenancy: Joint tenancy gives each homeowner equal property shares, but it has some strict rules governing Right of Survivorship and financial responsibility.
• Tenancy in common: With tenancy in common, property shares can be divided equally or unequally between homeowners and be left to each individual’s heirs, rather than being passed to the remaining co-owners. Typically, however, passing property in this way will still require probate, which joint tenancy avoids.

3. Decide On Property Type

If you’re moving in with a friend, you might not be interested in a traditional single-family home, though this can be a great option if you’re on board with living closely together. Some other options to consider include various types of multifamily homes, like duplexes.

You might even consider getting a larger home with three or four units if you want to live in and gain rental income from your home at the same time.

4. Divide Responsibilities Equally

A lot goes into owning a home. Having multiple people to split those responsibilities can be a huge help or a major hurdle, depending on how well you and your friend or friends communicate.

Try to figure out upfront who will take care of which responsibilities and how you’ll divide the financial contributions when it comes to various utilities, repairs and other costs. It might even be beneficial to set up a home fund to make sure you’re contributing and have access to emergency funds needed for unexpected housing costs.

5. Make A Plan For Moving Or Selling

Figuring out how to split up might feel like a bad start to owning a home together, but it’s important to have an idea of what you’ll do if something unexpected happens.

Maybe you lose your job and need to move to find a new opportunity, or your company needs to transfer you to another city. Perhaps your friend gets into a new relationship and wants to move in with their significant other, or you need to move back home to support your family.

Discuss how you’ll handle the situation if one of you has to leave. Will you sell or will you refinance as a single tenant? How will you split selling costs, profits and responsibilities? Regardless of what might cause it, you and your friend might need to break off your home partnership sooner than expected. It’ll be a lot easier to handle if you have a plan in place ahead of time.

The Bottom Line: Buying A Home With Friends Requires Careful Consideration

Buying a house with a friend or group of friends might be a great way for you to achieve homeownership, but it’s not a decision you should make lightly. Before diving in, make sure you understand the financial and logistical hurdles you’ll face, as well as the human and emotional elements that might affect the purchase or, more importantly, your relationship.

When all parties are ready, you can start a mortgage application online and review your home loan options together.