Double Your Mortgage Buying Power With A Friend Or Relative

February 6, 2017 - 5 min read

You Can Buy A Home With A Friend Or Family Member

You’ve found the perfect home.

But you can’t afford the monthly mortgage payments on your own.

Why not buy this home with your best friend? Maybe you can even buy it with a family member, girlfriend, or partner.

This is possible. By combining your two incomes, you and your friend or family member double your buying power, and might get into a home that neither of you could afford on your own.

Today’s mortgage programs allow non-married buyers to go in on a house together. FHA loans, as well as the Fannie Mae HomeReadyTM mortgage and others, have written guidelines addressing this situation.

But be careful. The key to buying a home with someone to whom you’re not married is to have a plan in place before you sign mortgage documents.

Preparation can make your co-buying plans work out nicely for you and your home-buying partner.

Why Buy A Home With A Friend Or Family Member?

There’s a reason why people often choose to buy a home with friends and family: homes across the country are getting more expensive.

According to the latest numbers from the National Association of REALTORS® (NAR), the median price of an existing home stood at $232,200 in December. That’s up four percent from December 2015.

December’s increase isn’t unusual. The association reported it was the 58th consecutive month of year-over-year increases in the median price of homes.

The problem is that the average wages of U.S. workers haven’t risen nearly as quickly.

The Bureau of Labor Statistics reported that average hourly earnings of U.S. workers rose just 2.4 percent in 2016 — relatively low by historical standards. This is making it more difficult for consumers to afford homes in the top neighborhoods across the country.

When borrowers can apply for a mortgage with a friend or family member, though, they can combine their incomes.

They are then more likely to afford that nice house in a desirable community that is otherwise out of their price range.

Challenges Of Co-Buying A Home

Before you and your friend, girlfriend, boyfriend or partner sign for a mortgage, though, make sure you meet with a real estate attorney.

This legal professional can draw up a contract that will anticipate any possible problems from your real estate deal.

A contract may sound unromantic, unfriendly, or an inappropriate way to treat family. But it’s the only way to head off potential challenges that could cause bigger relationship issues later.

A contract, for instance, should state exactly how much of the home each buyer will own. You might only be paying 40 percent of the monthly mortgage payment. The contract, then, will state that your ownership share of the home is just 40 percent of its value.

The contract should also state how owners will pay for maintenance and repairs.

Say the home you and your brother buy suddenly needs a new roof. You might want a contract stating that you and your fellow owner are equally responsible for such repairs.

If one owner is happy to pay for all of the maintenance and repairs – perhaps for a larger share of ownership – that should be spelled out in the contract, too.

Make An Exit Plan Before Buying

Perhaps most importantly the contract should contain a procedure for selling the home.

You might think living with your best friend or sister is great for now. But what if your employer transfers you to a new city? What if you want to get married and buy a home with your new spouse?

It’s very likely that two buyers will part ways eventually, if not in their relationship, then geographically.

That mortgage you and your friend are paying might become a hindrance to other goals.

If you no longer want to stay in the home you own with a sibling or friend, the easiest solution would be for you and your fellow owner to sell the home and then split the proceeds as agreed upon beforehand in a written contract.

But what if your fellow owner doesn’t want to sell? If you don’t spell out in the contract how to handle this, you might have little choice but to file a partition action.

This is a civil lawsuit to force your fellow owner to either buy your interest in the home or agree to sell the residence.

If you have a tenants-in-common ownership arrangement – more on this in the next section – you can always sell your share in the home to someone else, without getting the permission of your fellow owner. This might not be easy, though. It can be difficult selling just a share in a home and not an entire home.

A signed contract containing an exit strategy can avoid this. Say you and your fellow owner both sign a contract stating that if one owner wants out of the home, the remaining owner must either buy out that owner or must agree to list the home for sale.

This way, the situation is resolved without any type of legal action.

Consider Potential Home Title Issues

When it’s time to buy with a friend or family member, you’ll also have to tackle some title issues.

Married couples usually include the names of both parties on a home’s title. This shows that they both own the home. You can do the same when buying a home with friend or family member.

You can share title as what is known as “tenants in common.”

With a tenants-in-common arrangement, you or your fellow owner can sell your share of the property at any time, without anyone else’s permission. You or your fellow owner can even just give up a share of ownership to someone for free.

That could be awkward. You could end up sharing your home with someone you don’t know.

Alternatives To Co-Buying A Home

Buying a home with a friend or family member could lead to rewards, but also problems.

To minimize risk, set up an arrangement that requires a lower level of commitment from one party. You could create a rental agreement with your friend or family member. You buy the home and put your name on the title, but your friend or family member lives in the home, too, and pays rent.

Of course, you have to qualify for the loan on your own for this to work.

If you have a history of living with your proposed co-buyer, you might qualify for the HomeReadyTM mortgage more easily than other programs. It requires just 3% down, and the lender will consider income from a non-borrowing household member.

Another option is to receive gift funds.

With an FHA loan, you can receive a financial gift for the entire downpayment and closing costs. The donating party can be a family member, or anyone with whom a long-standing relationship can be established. If you are co-borrowing because one party has all the cash, that can be resolved easily enough with this strategy.

FHA applicants can be approved with a debt-to-income ratio of up to 50%. This flexibility can help a single income qualify for the loan.

Whether you choose to buy a property with another person, or on your own with that person’s help, the first step should be agreeing to terms of the arrangement up front.

What Are Today’s Rates?

Today’s mortgage rates ultra-low, whether you are looking for a conventional, FHA, VA, or USDA loan.

Check your eligibility for your upcoming home purchase now, and start on your homeownership path.

Dan Rafter
Authored By: Dan Rafter

The Mortgage Reports contributor

Dan Rafter has written about mortgage topics for more than 20 years. His stories have appeared in the Washington Post, Wise Bread, the Motley Fool, Fox Business, and more.