It’s been a minute since you moved into your apartment. And you’re so over it.
The time seems right to buy a home. You’ve been toying with the idea of co-buying … with a friend, maybe your SO or both.
Before proceeding with a co-borrower situation, think carefully about your relationship with your co-borrower.
There are clear advantages to co-buying. Pooling incomes allows you to shop in a higher price range and, when you buy, divvy up the down payment, closing costs, etc. More savings comes when you split up the monthly mortgage payment and maintenance fees. And you’re building equity way quick.
Of course, there are risks: What if you buy with your SO, and then break up? What if you buy with a friend, who then flakes and decides to stop paying his or her part of the mortgage? The best way to protect your interests and assets in this case is to plan carefully and consult with a real estate attorney from the get-go.
Make Sure it Makes Sense
A lender will evaluate each person’s financial situation to determine eligibility; the lowest credit score among applicants will be used to determine the interest rate. If your co-applicant has so-so or poor credit, you’re going nowhere fast, financially speaking.
Even if you both have good credit habits, ish happens. Someone may lose a job or face a financial hardship that makes paying his or her portion of the mortgage impossible. And when one person gets behind on payments, all parties suffer a credit rating ding. To avoid worst-case situations, shop for a home in a price range you can afford on your own.
Choose the Title Type
A handshake or peck on the cheek isn’t going to cut it in this case. You and your co-buyer must decide how you will hold title.
Tenants in Common (TIC)
Two or more buyers own equal or unequal percentages of the home. (Percentage can be based on income, how much each party contributed to the down payment or other). Each tenant can sell off his or her percentage of the home and/or pass that percentage on to heirs WITHOUT buy-in from other tenants.
Joint Tenants With Right of Survivorship (JTWROS)
Two or more buyers own equal percentages of the home. With consent of other tenants, a tenant can transfer ownership of his or her percentage to another party. Tenants cannot pass ownership on to heirs; shares are automatically passed to surviving tenants.
Get a Co-Buyer Agreement in Writing
This document, prepared by a real estate attorney, should outline the type of title you and your co-buyer have chosen, who owns what percentage of the home (If TIC), how mortgage payments will be divided, how other expenses and maintenance of the home will be divvied up and the process by which someone transfers shares.
If TIC is your title of choice, you have further questions to answer. Do you want to stipulate who a co-buyer can sell to? Do you want first right of refusal? Or should dissolution of your friendship/romantic relationship or change in life situation trigger an immediate property sale? If so, who will sell the home for you, how will you divide up the proceeds, etc.? Talk through these issues now so you avoid hot heads and bad decisions should life take a turn.
One Last Thought Before You Hit the Back Button
If fast track to home ownership = yes, but live-in co-buyers = no, you have one more option: a non-occupying co-borrower program.
The benefits? A co-buyer contributes to the down payment and/or chips in a killer credit score that results in better terms. And you own a home with no roomies. The catch? The lender may require that your co-buyer be a close relative or a friend of long standing (better be able to prove it). And some programs require that the down payment come from one of your own accounts.
Before proceeding with a co-borrower situation, think carefully about your relationship with your co-borrower. Although you make the monthly mortgage payments, your co-borrower is on the hook if your financial situation changes and you default. If your relatives (parents, right?) are super chill and/or you’re super responsible, this may be a non-issue. But if the relationship is in any way touchy, you may be in for more trouble than it’s worth.