In recent years, high housing prices have made it difficult for single home buyers to enter the real estate market. More and more people are opting to buy houses with partners, family, or friends to reduce costs.
Co-buying a home can be an excellent way for you and your loved one to secure your financial futures, but it’s also a big commitment that comes with risks. Here are 10 steps for friends, relatives, or unmarried couples to purchase a house together:
1. Get Preapproved
Anyone interested in purchasing a home should start by seeking mortgage preapproval. A preapproval letter confirms that a lender is willing to offer you a home loan, so it makes you and your co-buyers much stronger competitors in the market.
You and your partner should both be included in the preapproval application. The lender will request the following documentation:
- Government-issued ID
- Pay stubs
- Bank statements
- Tax returns
- List of debts
- Investment account statements
- List of monthly expenses
- Proof of rental history
2. Set a Budget
Your preapproval letter will state a maximum amount that you and your co-buyer can borrow for a home. However, your actual budget may need to be smaller. You and your partner should consider your other monthly expenses when evaluating how much you can comfortably spend on a home.
A general rule of thumb is that you should spend less than 28% of your gross monthly income on your housing payment. You don’t want to live paycheck to paycheck as a homeowner, especially when someone else is relying on you to pay your half of the mortgage.
3. Choose a Location
Location is one of the most important considerations when buying a home. You can renovate your house, but you can’t change where it’s located.
You and your partner should list all the towns and neighborhoods you’re interested in living in. Consider proximity to work, recreation, and amenities as well as features of the neighborhood itself. Would you prefer living in a quiet cul-de-sac or in a walkable neighborhood near downtown?
It can be incredibly difficult to compromise on location when buying a home with someone else. Try to focus your search only on cities or neighborhoods that you both agree on.
4. Identify Needs and Wants
Knowing each person’s needs and wants will help you narrow down the home search. Both buyers should write a list of their non-negotiable needs as well as features they’d like to have in a home. Make it a priority to search for houses that satisfy both buyers’ needs, but be open to compromising on your wants.
5. Talk to an Attorney
When buying a home with a friend, relative, or partner, both parties need to be legally protected. Houses are huge investments that almost always grow in value over time. All buyers need to be held responsible for their share of the payments, and they should be entitled to their share of the equity.
Before making any offers, consult with a real estate lawyer on your situation. An attorney will help you understand the different types of ownership structures and draft a contract. A local real estate lawyer will also tell you if any laws in your state may impact your co-buying experience.
6. Determine the Ownership Structure
If both partners are paying for the house, both will be on the mortgage. However, the mortgage doesn’t determine ownership of the home. The title is the legal document that indicates homeownership, so you and your co-buyers must be in agreement on the structure of the title.
In a sole ownership agreement, only one homeowner is listed on the title even if multiple people are on the mortgage. A buyer who’s not listed on the title doesn’t have any legal claim to the house, so they’re essentially renting their space from the title holder. This type of agreement is not equitable for both buyers, so partners usually avoid it.
With a joint tenancy agreement, you and your co-buyer will have 50/50 ownership rights. When you sell the house, you’ll split the proceeds equally. If one partner passes away, the other will inherit their share of the property. Under a joint tenancy agreement, you also need permission from your partner to sell your share of the home.
The other popular option is a tenancy in common agreement, which allows the co-buyers to divide up the house into unequal shares. For instance, if you paid 70% of the down payment and cover 70% of the monthly mortgage, you and your co-buyer might agree that you’ll own 70% of the house and your co-buyer will own the other 30%. If you and your partner sell the house, you’ll receive 70% of the proceeds, and your partner will receive 30%. With this structure, one co-owner can sell their share without permission from the other.
7. Create a Legal Agreement
Your real estate attorney can help you and your partner determine which ownership structure is best. Then, they’ll draft a contract for both co-buyers to sign. Even if you and your partner are completely aligned on your future plans, you still need the legal protection that a contract provides. You never know how your situation will change in the future, and signing a contract will ensure that everyone’s interests are upheld.
8. Consider Future Possibilities
Not only should your contract include the current terms of your agreement, but it should consider future possibilities as well. What will happen if one of you needs to move out of state? What if someone loses their job and can’t pay their share of the mortgage? What if one of you passes away?
Your contract should include a course of action for any of these scenarios. Some co-buyers agree that if one person wants to move out, they’ll both sell the home and split the proceeds. Others agree that the remaining homeowner will buy the other one out.
9. Give Everyone Veto Power
In recent years, high housing prices have made it difficult for single home buyers to enter the real estate market. More and more people are opting to buy houses with partners, family, or friends to reduce costs.
Co-buying a home can be an excellent way for you and your loved one to secure your financial futures, but it’s also a big commitment that comes with risks. Here are 10 steps for friends, relatives, or unmarried couples to purchase a house together:
10. Agree on Household Tasks
Before becoming co-owners, you and your partner should discuss how you’ll manage the upkeep of the property. If you currently live together in a rental, you may already be used to a division of household labor. However, there are usually more tasks involved in homeownership, such as lawn care and preventative maintenance. You and your co-buyer could divvy up these tasks equally, or you could both contribute money to a home care fund and outsource the work to a landscaper, cleaner, and handyman.
Co-buying can be a great way to achieve homeownership and work toward shared financial goals with a partner, close friend, or family member. You must be careful when entering such a big agreement with another person, though. To successfully co-buy a house, you and your partner should keep open communication, consult with professionals, and create a legal agreement that protects you both.
