Key Steps When Buying A House With Friends

We hear you. Saving all your money to buy a house is hard. Especially now with the new mortgage rules. So, it might be wise to pool your resources and buy a house with your friends.

Like all things in life – in order for this to be successful you must plan for this. You must plan to have open communication (and documents) and you must plan not only for the buying part, but also for the sale of your home. Not only that, but you must also plan a contingency plan incase someone wants out, someone needs to move, or someone get’s married and needs their equity to buy a new house.

If you are thinking about buying a house with your friends, we have some key things to take care of before you do.

1. Vet Your Friends

This is a time for blatant, open, honest dialogue! You are going to be getting into bed with your friends and so you need to know what you are getting yourself into.

  • Review finances: Lay out everyone’s credit scores, monthly income, down-payment portions, extra savings accounts, retirement funds—everything. When the roof needs replacing a year after you buy, that is not the time to learn Jane doesn’t have extra cash for big fixes.
  • Talk responsibility: Are your friends generally dependable people? Do they follow through on what they have promised? Will everyone be open and honest?
  • Consider business acumen: Buying a home together is a business deal. It’s not just a residence but an investment. Make certain your co-owners have a business-focused orientation.

2. Get a Loan With Your Friends

There is some debate about what is “best practice” when it comes to a mortgage loan, who should be on it, credit scores, etc. We will leave that up to you and the banks and the lawyers to sort out.

One expert suggested, “Every owner should be listed on the loan paperwork, in order to avoid future disagreements about repayment.”

Others say, “in order to qualify for the best loan, only the person with the best credit and highest income should apply. If one of you has a significantly higher credit score, having the other person sign, too, could mean higher rates.”

3. Get A Lawyer

Hire a lawyer. Hire a great lawyer. Invest in this!

You might consider a joint tenants or a tenants-in-common deal, where you all own shares of the property. Either way, make sure the contract includes these details:

  • Payments and ownership: Spell out who contributed money to the down payment (and how much) and who pays for what portion the mortgage, real estate taxes and home repairs. Make sure all of these items are clearly defined and outlined.
  • Receipt of tax deduction: Only one owner can claim a tax deduction on the home. Specify who will claim the deduction and what the co-owner(s) will receive as compensation.
  • Decision-making process: At the outset, make a plan for resolving disputes about home maintenance costs. Otherwise, every needed repair can create disagreements. One person in the home might want to keep on top of seasonal updates while other members of the household may not find these tasks necessary.
  • Daily life: Much like sharing a rental, sharing home ownership requires rules. Set out guidelines about noise, parties, guests, cleanliness and pets. Cleanliness is a huge problem for a lot of people that live together. We are not asking you to sign a roommate agreement like in the Big Bang Theory, but we think it would be wise if you had one outlined for future reference.

4. Plan For The Sale Of Your Home

This harmonious co-habition will come to end. At some point in time, someone will have to move, someone will get married, or things will just come to end. At that time you should be ready to exit with your investment in tact.

All of this should have previously been outlined in the agreement with the lawyer and everyone should be clear on the expectations so there should be no surprises.

If moving in with your friends still seems to be a questionable choice, co-homeownership might not be the best idea for you. However, if you can handle the questions, guidelines and shared responsibility this could be a great option to get into a home, start building equity and planning for your future.