It’s completely possible for you to purchase a house or other property with someone who isn’t your spouse, like a friend or family member.
“It’s a beautiful occasion, but it’s also a complex business transaction,” says Senior Managing Partner of New York City-based Law Firm of Kishner & Miller, Bryan Kishner. “There are tremendous positives to the overall thing, but people need to be careful with the unforeseen items, and a lot of people say they didn’t think about that.”
For friends who are unable to afford a home in their area on a single income, or cohabiting couples, buying a home together can help both parties boost their net worth or simply achieve a goal of becoming a homeowner.
That being said, purchasing a home with a friend can be more complicated than buying a house with your spouse. The key to a successful co-homeownership arrangement is to set yourselves up for success from the get-go.
Choose the Right Joint Homeownership Structure
When you buy a home, you’ll get a title, which proves the property is yours. The paper the title is printed on is called a deed, and it explains how you, the co-owners, have agreed to share the title. The way the title is structured becomes important when you need to figure out what happens when a co-owner needs to part with the property.
These are the two most common ways to approach joint homeownership:
1. Tenants in Common
A tenants in common, or tenancy in common, is the most common structure people use when they purchase a property for personal use. This outlines who owns what percentage of the property and allows each owner to control what happens if they pass away. For example, a co-owner can pass their share onto any beneficiaries in a will, and that will be honored.
The TIC allows co-owners to own unequal shares of the property, which can come in handy if one owner will occupy a significant majority or minority of the shared home. For example, if two friends decide to buy a multifamily home, but one friend pays more because one friend’s space has much more square footage than the other friend’s space, they can split their shares of the home accordingly.
Kishner says to make sure you “reference and evidence your intent to use the tenants in common structure on the deed,” as it’s the primary evidence of your ownership — meaning you would write who owns what percentage of the property on the deed and note the parties chose a TIC structure.
The Pros of a TIC structure
Ownership can be unevenly split
You can own as much or as little as you want of the property as long as the combined ownership adds up to 100%. So, if you’re putting up 60% of the down payment, you can work it out with the other co-owner(s) to own 60% of the property on the title.
You don’t have to live there
You can own part of the property without living there. This is relevant for someone who simply wants to be a partial owner, but doesn’t want to live at the property.
You get to decide what happens to your share after you pass away
The TIC allows you the flexibility to decide what happens to your interest in the property in the event you pass away. You can decide if it will go to the other co-owners or to an heir. Regardless, the decision is yours.
The Cons of a TIC structure
Co-owners can sell their interest without telling you
Co-owners in a TIC can sell their interest in the property at any time, without the permission of others in the agreement. However, if they are also on the mortgage loan, they are still on the hook to make payments, says Rafael Reyes, a loan officer based in New York City.
2. Joint Tenants with Rights of Survivorship
This arrangement is different from a tenants in common arrangement in that in the case of one co-owner’s death, the deceased party’s shares will be automatically absorbed by the living co-owners. For this reason, this type of structure is more common among family members or cohabiting partners looking to purchase property together.
If, for example, you are purchasing with a family member and would like them to automatically absorb your portion in case you pass away unexpectedly, this is the option you’d go with. Even if the deceased has it written in their will to pass their interest to a beneficiary, that likely won’t be honored.
A joint tenants agreement requires these four essential components:
- Co-owners must all acquire the property at the same time.
- Co-owners must all have the same title on assets.
- Each co-owner must own equal interests in the property. So if you buy with one friend, you’ll own 50%, but if you buy with two friends, you’d own one-third of the property. This may be an important consideration if co-owners will occupy different amounts of space in the property.
- Co-owners must each have the same right to possess the entirety of the assets.
The Pros of a joint tenants agreement
Everyone owns an equal share in the property
There’s not arguing over shares if you go with a joint tenants arrangement, since it requires all co-owners to have an equal interest. So each co-owner has the same right to use, take loans out against, or sell the property.
No decisions to make if someone dies
There’s nothing for co-owners or family members to fight over after you pass away. Your ownership shares are automatically inherited by the other co-owners when you pass away, regardless of what might be written in a will.
The Cons of a joint tenants agreement
Equal ownership can be a con as much as it’s a pro. If you’re going to occupy more than 50% of the space, or put up more of the mortgage or down payment, you may want to own more than your equal share of the property. If that will bother you, a TIC agreement is best.
How to Create a Co-ownership Agreement
Before you even start the mortgage lending process, it’s recommended to work out an agreement on how you’ll split equity in the home, who will be responsible for maintenance costs, and what will happen in the event of major life events such as death, marriage, or having children.
“You are more or less going into business together” when you purchase a home with a friend or relative, says Kishner. And like any smart business owner, you’ll want to protect yourself in case things go south down the road.
A real estate attorney can help you set up an official co-ownership agreement.
Kishner recommends each person in the agreement get their own attorney, who can represent each party’s personal concerns and interests during negotiation. Rates vary by location, but he estimates a good real estate lawyer would charge around $1,000.
Ideally, Kishner says, this agreement is created and signed before closing the mortgage loan. That way, if simply going through all of the what-ifs scares someone off, they have the opportunity to pull out.
3 Questions Every Co-ownership Agreement Should Answer
The co-ownership agreement you draft and sign will need to address many issues. Here are three common scenarios the experts offered us:
1. What happens if someone wants out?
Your agreement should outline an exit plan in case one or more of you want out of the property. This could be because of a number of reasons but is the area where things can get extremely complicated. For example, what if one of the co-owners wants to be bought out by the other co-owners?
Let’s say you’ve got three people on a mortgage and on the title to a property. If the other two can come up with the money for the equity, you’ve solved that problem.
But if someone wants to sell their interest in the property, for example, Reyes says they can’t just take the cash and walk away, since they’ll still have some financial obligation to the home if they are on the mortgage. So you’d need to also refinance the mortgage to get them off of it, and that could affect the other co-owner’s financial picture. The only way to relieve someone of their financial obligation to the mortgage is to refinance with the lender. That’s because if they leave and decide to stop making mortgage payments, that will affect your credit score.
Be prepared. When you refinance, the remaining co-owners will need to qualify again for the mortgage. If you decided to add a co-owner because you couldn’t originally qualify for the property based on your income, you might not qualify to own after a refinance.
If you can’t refinance, you all may decide to arrange for the departing member to rent out their living space in the household … then you’d need to deal with the issues surrounding finding a roommate or having a tenant. However you all want to go about handling this kind of situation should already be outlined in the co-ownership agreement, so you’ll have one less thing to argue over in a split.
2. What happens if a co-owner loses their job?
You want to be prepared to fulfill your financial obligations if someone loses their income. That’s why it’s recommended to create a shared emergency fund, which you can draw from in the case that one of the owners runs into financial issues (or, of course, to handle any maintenance needs). You can establish the contributions and rules surrounding a shared emergency fund in your co-ownership agreement.
Reyes advises putting away about six months’ worth of the property expenses into a shared savings account.
“That six-month reserve, at least, is important because ultimately, God forbid, if there is some kind of financial turbulence like job loss, they can cover the mortgage or they could sell the home within six months in this market,” said Reyes.
3. How will you pay bills and taxes?
The co-ownership agreement also needs to address how you all will split up housing costs. Kauffman says you should set up a joint account and agree on what each party should contribute to the fund each pay period.
You should consider the repairs, maintenance, and upkeep on the house, as well as things that could increase over time such as property tax and homeowner’s insurance, too, Kauffman adds. In the event those costs exceed what you’ve set aside to pay for them in escrow accounts, the co-ownership agreement needs to outline how the extra bill will be paid.
Applying for a Mortgage as a Joint Homeowner
If you want to purchase a home with a friend or relative, you’ll first have to decide whether or not both of your names will be on the mortgage.
A lender will consider both of your credit scores during the underwriting process, which means a person with a lower credit score could drag down your collective credit score, leading to higher mortgage rates.
Kauffman strongly advises reaching out to figure out your financing before applying for a loan with friends.
“Each of them might understand what they can afford on their own, but they may not be aware of how their purchasing power changes,” Kauffman says. You may find you qualify for more or less house than you thought you could afford.
He adds there are some serious things to consider when you decide to enter into an investment with other people that you’re not necessarily tied to. Carefully consider your personal relationships with the people you’re going into homeownership with.
“You’ve got to really consider who you’re getting into it with and really consider all of these things that are bound to happen when you have [multiple] lives,” says Kauffman.
It can also be potentially awkward when friends or colleagues realize they must reveal aspects of their finances that they might prefer to keep private, such as their credit score, credit history, and total income.
“Oftentimes people learn a lot about their [co-owner] through a credit report, and it becomes embarrassing and uncomfortable sometimes,” says Rick Herrick, a loan officer at Bedford, N.H.-based Loan Originator.