Homebuyers have had to get creative in recent years. They’ve sold crypto and cars for down payments and asked sellers to buy down their mortgage rates. Some have even turned to therapy to cope with high prices and painfully low supply.
Increasingly, they’re even opting to buy homes with others — and not a spouse or partner, either.
Take David Sheppard, who just bought a house with his older sister, Lois, in West Covina, California. Or Stephen Georgilis and Anthony Mirabella, bandmates from New York, who purchased a Long Island home to share in the area’s high housing costs. Or Greg Gaudet, who bought a property with his in-laws in Hawaii.
These aren’t isolated stories. A recent Zillow survey shows that co-buying — or purchasing a home with someone you’re not in a relationship with — is incredibly common. In fact, 18% of recent homebuyers purchased with a relative or friend, while about one in five up-and-coming buyers say they intend to. (According to the Housing Innovation Collaborative, co-buyers made up only around 13% of purchases in 2015).
“As housing prices have increased, so have the amount of people co-buying in order to get into a home,” says Jennifer Beeston, SVP of mortgage lending at Guaranteed Rate Mortgage.
Beeston’s right: For most, it’s about money — splitting the costs of high-priced real estate and the bills that come with it. But others do it to help provide care for family members, take advantage of built-in babysitting or just enjoy some at-home camaraderie.
Whatever the reason, co-buying isn’t for everyone. In fact, there could be some serious downsides to buying with another person.
“Homebuying is incredibly personal,” says Niles Lichtenstein, co-founder of Nestment, a co-buying platform. “When co-buyers aren’t on the same page in terms of their vision or haven’t disclosed pertinent information to their co-buying partners, it can lead to added stress and issues down the road.”
As Bryan Sherman, wealth management lending executive at Bank of America, puts it, “Joint homeownership is not a decision you should make lightly.”
Co-buying mortgage pros and cons
Buying a home with another person has some obvious advantages in the mortgage department. With two incomes in the mix, buyers can likely qualify for a larger mortgage — a big help in today’s high-cost market.
“The application includes two incomes, allowing them to borrow more money,” says Vangie Villamil, a loan originator with Amerifirst Home Mortgage in Winter Park, Florida. “By qualifying at a higher price point, their budget increases and they can consider a wider range of homes to purchase. It gives them flexibility, options and more purchasing power.”
Co-buying may also allow for a bigger down payment, depending on how much each party has saved up. And a higher down payment? That can have big benefits. It might mean a lower interest rate, a lower monthly payment or, in many cases, avoiding costly mortgage insurance.
In some cases, though, buying with someone else can actually hurt your mortgage application — particularly if they carry lots of debt, have inconsistent income or have a low credit score. All of these factors increase the risk to a lender and could mean a more challenging process or, often, a higher interest rate.
“As a mortgage lender, when I’m looking at an application with multiple borrowers, we go off of the lowest middle credit score,” Beeston says. “So, if for instance, your score is 800 but your co-buyer’s is significantly lower, that can lead to a higher mortgage rate.”
There’s also the question of making payments. In a perfect world, splitting the mortgage and other costs of homeownership is great — but that’s only if your co-owner (and their income) can be relied upon.
If one owner loses a job or otherwise can’t make their part of the payment, the responsibility would fall on the other. And if the payment’s missed altogether? It will hurt the credit score of both borrowers — not just the one with financial difficulties.
"Both you and your co-borrower are expected to make monthly mortgage payments,” says Jennifer Patchen, a broker with Opendoor. “You’re both on the hook if someone doesn't make a payment.”
Sharing space — and home equity
Beyond the mortgage implications, there are also potential personal and logistical issues to think about before purchasing a home with a friend or relative.
For one, how comfortable are you with having them around all the time? For Laura Burton, owner of the blog Mom Envy, building a home with her mother-in-law was a slam dunk.
“It has been so beneficial for both sides,” Burton says. “We have a babysitter for our children often, we both take care of each other's dogs when we're gone for long periods of time, and my husband is able to shovel snow and take care of yardwork so that my mother-in-law doesn't have to.”
For Gaudet, who shares a property with his in-laws, too, it’s another story.
“It’s just awkward, and I feel like I can never have complete privacy,” he says.
Logistically, co-buyers also need to agree on how the property will be maintained and, if updates or renovations come up down the line, how to go about those.
“There are constantly disputes about what we should be allowed to do with our property,” Gaudet says. “I think her parents think it’s their property, but we pay for it, too.”
Finally, there’s the loss of wealth to think about. When purchasing a home with another party, you’re not just sharing in the costs of the home but the equity you build and your eventual sale profits.
This issue is particularly top of mind for Gaudet, who owns Maui Home Buyers and is a professional real estate investor by trade.
“As an investor, I know that probably the single biggest benefit of homeownership is earning equity in your home, but when you share a property you also share the equity appreciation,” Gaudet says. “We would already have earned $350,000 in equity, but since we have to share that equity with her parents we have actually only earned about $175,000.”
Co-buying tips for success
Not all co-buying arrangements turn sour, and there are definitely ways to improve your chances of a successful experience. Here’s what pros suggest if you’re considering co-buying a house:
Make sure you’re buying a house with the right person.
“You really have to ask yourself, do you want to be in a long-term contract and cohabitation with the other co-owner? Know going in if the other co-owner is stable, trustworthy and able to pay their portion of the mortgage. You should also know their friends, associates and family if the co-buyer is not a relative, so you understand the kinds of people will you likely co-mingle with and maybe, at times, share space with.”
— Nasha Knowles, a certified financial planner with Equitable Advisors
Talk finances first.
“Be sure to discuss credit scores, go through all paperwork together, plan out how you will account for tax breaks, how you plan to split expenses and decide what the exit strategy will be if one co-owner would like to move out or move on from the investment.”
— Jennifer Patchen, broker with Opendoor
Prep your credit.
“It’s easier to qualify if you both have excellent credit, financial reserves and job history. If any one of those items are not in line, talk with your lender to understand your options. Is it better that one person has the loan, or are there a few steps a buyer can take to increase their score and result in a better rate?”
— Christian Ross, associate broker at Engel & Völkers
Cover the logistics.
“A home is oftentimes the largest investment consumers make, making it all the more important for co-buyers to enter the arrangement fully educated. If you’re co-buying with someone, you should clearly define contributions for mortgage and other costs, such as water and electric and the division of maintenance work.”
— Glenn Brunker, president of Ally Home
Draw up a contract.
“I always advise my clients of the risk and to talk with an attorney. You want to make sure you are both in agreement in how title will be held, how the mortgage will be paid and how profits will be split. Make sure you have a separate document created by an attorney that outlines all of the parameters of your agreement. This will allow you to reference the agreement whenever emotions come into play.”