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Many regions of the United States are in a seller’s market as home prices continue to rise. In fact, December 2021 Zillow data found that the median sale price of a new home increased over 19 percent compared to the previous year, making housing increasingly difficult to afford for many people. In an answer to this problem, many working adults—30 percent, according to a 2017 Zillow survey—have to share living spaces, as opposed to living independently. Some of these potential home buyers might think it’s a good idea to loop in a roommate from the outset as a co-purchaser of a home.
“Shared housing can be a great option for people with nontraditional housing needs—especially now that people are living longer and pensions are going away,” says Aaron Dorn, who is the chairman, president, and CEO of Studio Bank in Nashville, Tennessee. “Shared housing can provide financial benefits and a degree of empowerment to friends—and families—that may have lifestyles and needs beyond the stereotypical household.”
There could also be other reasons why you might want to purchase a house with a friend. “There are three types of residences that people want to purchase: primary, secondary, and investment,” explains Melinda Wilner, chief operating officer at United Wholesale Mortgage in Pontiac, Michigan. In addition to a primary residence, she says friends might want to buy a vacation home together or an investment property that’s used to generate additional income.
Regardless of the reason, buying a home with a friend can be a tricky scenario, especially if it’s a home that one or both of you plan to live in. If you decide to take that route, here’s what you need to know and do.
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You need to understand their financial situation.
If you are going to buy a house with a friend, Melissa Cohn, regional vice president of William Raveis Mortgage in New York, New York, says it should be a really good friend—and you should have a really good understanding of their finances. “When you buy a home jointly with someone else, you are each jointly and separately responsible for the mortgage payments,” she says. So if your friend doesn’t pay their share, guess who is responsible for making the payments? “While the same is true if you buy with a spouse, it is harder for a spouse to walk away than someone where there is no formal legal commitment to each other.”
Although it may be an awkward conversation, you need to understand how much income they make from all sources, as well as what their debts are. In addition, you need to know their credit score and whether their employment is steady and solid.
You need a written agreement.
Since this is not a spousal relationship, it’s a good idea to have a written, legally binding agreement. “If a married couple purchases a home together and then divorces, there are state laws which dictate the division of property,” says Michael J. Franco, a broker for Compass in New York, New York. But there are no such laws that relate to friends. “Therefore, if friends or non-married partners are purchasing a home together, they should have a written agreement executed which dictates what will happen if one of the parties wants to sell, if there is a falling out with the relationship, or, God forbid, [one person] dies.”
You need to be on the same page.
Even if you have great synergy with the other person and no tragedies strike, there are still other potential changes that can wreak havoc on this venture. For example, suppose one of you falls in love and decides to get married. How does a spouse change your arrangement? Suppose a down-on-their-luck relative wants to move in—indefinitely. Can you really tell someone who’s paying half the mortgage that their brother (who doesn’t have anywhere else to go) can’t stay in the house?
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You need to understand how joint ownership can affect your finances.
You’re probably thinking that buying a home with a friend is great for your finances, and perhaps it could be. “It can possibly result in larger loan amounts and lower interest rates than what a single borrower could obtain on their own,” Wilner says.
But there’s also a flip side. “The difficulty of joint loans is that while both parties are liable, each party is dependent on the other fulfilling their end of the loan,” Dorn explains. “And if one side fails to uphold their end of the deal, both parties are at risk.”
Ideally, you need a house you can afford on your own.
If you and your friend purchase a home that is dependent on both of your incomes, and if something happens to one of you, it’s going to upset the financial balance. You could lose the house and also ruin your credit rating, making it harder for you to find another place to live. However, you can greatly reduce the chances of this happening by making sure the home is affordable enough that you could make the payments on your own for several months while deciding your next steps.
You need to stick to your guns.
There may be certain compromises that you have to make when buying a house with a friend; you might not get a walk-in closet or a sunroom. However, there are certain things you should never compromise on when buying a home. For example, the home’s location affects everything from safety to walkability. Also, a fixer-upper house is usually less expensive, but you need to be realistic regarding your ability to make repairs yourself or to pay someone else to make them. That great deal won’t be so great if you end up sinking all your resources into a money pit.
You need to be joint signers.
Jason Gelios, a Realtor at Community Choice Realty in Detroit, Michigan, tells us he’s always leery of friends looking to purchase a home together because of the risk and obligation involved in a mortgage. Sometimes, friends may “buy” a house together in the sense that they are both making monthly payments, but only one person’s name is on the mortgage. “If both people are not on the mortgage as joint signers and one decides to split, it can wreak havoc on the mortgagee’s credit and living situation,” he says. Gelios advises friends to really analyze whether buying a home together makes sense, adding, “I always recommend non-spouses both apply for the mortgage so that both are on the hook for repaying the obligation.”