You Can Purchase A Home With The Help Of A Friend Or Family Member
You’ve found the ideal place to live.
However, you are unable to make the monthly mortgage payments on your own.
Why not split the cost of this house with your best friend? With the support of family, friends, or even a romantic partner, you may be able to purchase it.
By pooling more than one income, you and your friend or family member double your purchasing power and may be able to afford a home that neither of you could afford on your own.
Non-married buyers can now buy a home together using today’s mortgage programs. This situation is addressed in written guidelines for FHA loans, as well as the Fannie Mae HomeReadyTM mortgage and others.
Be cautious though. The key to purchasing a home with someone you are not married to is to have a plan in place before signing mortgage documents.
Preparation can help your co-buying plans go smoothly for both you and your home-buying partner.
Why Should You Buy A House With A Friend Or Family Member?
There’s a reason why people prefer to buy a home with friends and family: housing prices are rising across the country.
The median price of an existing property in December was $232,200, according to the National Association of REALTORS®. It’s a 4% rise over December 2015.
The December increase isn’t unusual. According to the association, this was the 58th consecutive month of year-over-year increases in home median prices.
The issue is that average wages in the United States have not risen nearly as quickly. Average hourly salaries in the United States rose by only 2.4% in 2016, according to the Bureau of Labor Statistics.
The Difficulties of Buying a House with a Partner
However, before you and your friend, girlfriend, boyfriend, or partner sign a mortgage, you should consult with a real estate attorney.
This legal professional can draft a contract that anticipates any potential issues with your real estate transaction.
A contract may appear to be unromantic, unfriendly, or an unsuitable way to treat family. However, it is the only way to avoid potential problems that could lead to larger trust issues later on.
A contract, for example, should specify how much of the house each buyer will own. You may only be paying 40% of your monthly mortgage payment. The contract will then state that your ownership stake in the home is only 40% of its value.
The contract should also specify how owners will pay for routine maintenance and repairs.
Assume you and your brother purchase a home that requires a new roof. You might want to have a contract that states that you and your co-owner are both equally responsible for such repairs.
Additionally, the contract should specify whether or not one owner is willing to pay for all of the upkeep and repairs.
Before you buy, make an exit strategy
Most importantly, the contract should include a procedure for selling the house.
You may believe that living with your best friend or sister is ideal for the time being. But what if your company relocates you to a new city? What if you want to marry and start a family with your new spouse?
Two buyers are very likely to part ways at some point, if not in their relationship, then geographically.
You and your friend’s mortgage could become a roadblock to reaching other objectives.
If you no longer want to live in the house you share with a sibling or friend, the simplest solution would be for you and your co-owner to sell the house and split the proceeds as agreed upon in advance in a written contract.
But what if your co-owner is unwilling to sell? If you don’t specify how to handle this in the contract, you may be forced to file a partition action.
This is a civil lawsuit to compel your co-owner to either buy your share of the home or agree to sell it.
If you have a tenants-in-common ownership arrangement – more on this in the next section – you can always sell your share of the home to someone else without asking your fellow owner’s permission. However, this may not be an easy task. It can be difficult to sell a portion of a home rather than the entire house.
A signed contract with an exit strategy can help to avoid this. Assume you and your co-owner sign a contract stating that if one owner wishes to leave the home, the remaining owner must either buy out that owner or agree to list the home for sale.
In this manner, the situation is resolved without the need for legal action.
Take into account any potential home title issues
When you buy with a friend or family member, you’ll also have to deal with some title issues.
Married couples usually include both of their names on the title of their home. This demonstrates that they both own the house. When purchasing a home with a friend or family member, you can do the same.
It is possible to share titles as “tenants in common.”
With a tenants in common agreement, you or your fellow owner can sell your share of the property at any time, without the permission of anyone else. You or your co-owner can even simply give up a portion of your ownership to someone for free.
That could prove to be awkward though. As a result, you might end up living with someone you don’t know.
If you have a history of living with your prospective co-buyer, you may be able to qualify for the HomeReadyTM mortgage more easily than with other programs. It only requires a 3% down payment, and the lender will take into account income from a non-borrowing household member.
Receiving gift funds is another option
You can receive a financial gift for the entire downpayment and closing costs with an FHA loan. A family member or anyone with whom a long-standing relationship can be established can make a donation. If you are co-borrowing because one party has all the cash, this strategy can easily resolve the situation.
FHA applicants with debt-to-income ratios of up to 50% may be approved. This adaptability can help a single-income borrower qualify for the loan.
Whether you choose to buy a home with another person or on your own with that person’s assistance, the first step should be to agree on the terms of the agreement up front.