Buying a House with a Friend or Co-Owner: Benefits & Drawbacks

Good friends hiking

Living with your parents well past your teens can be tough. As much as you love them, they can unintentionally rob you of your space and privacy. It could even jeopardize your relationship with them in the long run.

There is a simple alternative that offers more independence. Depending on your financial situation, it could be mutually beneficial to tag team a mortgage with a friend.

With the national average rent reaching an all-time high of $1,405 in June 2018 — increasing almost 3% year over year. Purchasing a home with a buddy might not sound so farfetched. While it’s common for friends to rent a place together after high school or college, it’s often a short-term arrangement until someone gets hitched or can afford his or her own place. If marriage isn’t in your foreseeable future and your present roommate situation is bliss, you might want to consider purchasing a home with a friend.

As with most important decisions — there are definitely pros and cons. Consider the following before deciding to move forward on buying a home with a friend. This checklist can also apply to family members, girlfriends, and boyfriends; in case you're wondering.

Benefits of home buying with a friend

1. Easier to qualify for a mortgage

Getting the best home loan you can is probably one of the more challenging aspects of home buying. Lenders take a look at your income, credit score, current debt, and more to gauge how much home you can afford.

To protect buyers, there are minimum loan requirements. These requirements can differ significantly depending on the loan program in question (FHA, Conventional, VA, CHFA). With two people signing the mortgage application, the odds of meeting all the requirements and getting approved usually increase.

2. Splitting monthly expenses

Sharing is caring among friends. Taking on the responsibility of paying for the monthly mortgage, utilities, maintenance, and repairs on your own can be scary. But it’s much less scary dealing with those expenses when you purchase a home with a friend.

You also get the added bonus of savings from sharing expenses. This means you keep more money in your pocket to save, pay off debt, invest back in your home, etc.

Tip: split the bills in half, or use an app like Zelle or Venmo to ensure prompt repayment for bills.

3. Home equity gains for all

The longer you and your roommate live together and make mortgage payments, the more home equity you build. Equity is the difference between your home value and what you owe the mortgage lender.

Realistically, you and your friend will one day go your separate ways. Unlike renting, homeownership lets you walk away with a lot of cash. The two of you can split proceeds from the real estate sale and put the money toward down payments on your own places. Sounds like a win-win!

Learn more about what to look for when purchasing a starter home.

4. Tax breaks for co-homeowners

When you and your friend pay interest on a mortgage — that interest is tax deductible. Keep in mind, if you own a house with a friend, the amount of interest you each deduct must add up to the total interest paid on the loan that year. No more no less.

Let’s consider an example. Say you jointly own the property and together paid a total of $9,000 in mortgage interest.* Either one of you can deduct $9,000 on your tax return (while the other deducts nothing), and you can split the deduction in half, or any other way you both see fit. As long as the method of choice adds up to the total interest paid. Doesn’t that extra tax return sound nice?

Want to learn more? Check out our mortgage interest tax deduction article.

Be sure to talk with a tax professional about the most beneficial way to handle deductions.

*This is a hypothetical number that would align with the amount of interest you could pay when purchasing a $250,000 home at a 4% interest rate with 10% down.

Drawbacks of home buying with a friend

1. Difficulty walking away

When you rent a house or an apartment with a family member or friend, it’s fairly easy to walk away from a lease. Not so much with a mortgage. Since both your names are on it — you’re both liable for paying the mortgage in full. You can’t pick up and leave without dealing with serious financial ramifications.

To get one of the names off the mortgage, you either have to sell or refinance the loan under just one name. Both options can be tricky. Selling can take many months, but there’s no guarantee the lender will approve your application to refinance. It’s a good idea to have a written agreement that details your agreed-upon plan should one of you decide to move.

2. Mortgage rate depends on both borrowers

Since you and your friend will both be on the mortgage, both of your credit reports will be pulled by the lender. One person’s poor credit can negatively impact mortgage terms, specifically the interest rate that you pay on the loan. Even a small change in interest rate – say 0.5% – can make a big difference in the amount due monthly over the life of the loan.

3. Risking your credit score

If one or both of you fall behind on mortgage payments, the lender will report both of you to the credit agencies for non-payment, regardless if you have diligently paid your share of the mortgage every month without fail. Worst case scenario — you could be looking at foreclosure. Because you’re both listed on the mortgage, your friend’s non-payment(s) could end up affecting your credit score big time.

4. Trouble qualifying for other loans

A mortgage on your credit report may limit your availability to qualify for other loans, like an auto loan for example. In seeing whether you qualify, the lenders will look at the amount of debt you’re responsible to pay monthly relative to your income, also known as your debt-to-income ratio (DTI). Since you’re responsible for the entire mortgage payment (your friend is also), your DTI may increase. Therefore, making you less attractive to lenders.

On the other hand, don't buy that new car before signing your mortgage either because it can affect your credit score and, which can, in turn, put a halt on your mortgage approval.

Things to consider about joint ownership

Buying a house with a boyfriend or girlfriend can work and work well for all. But don’t rush into anything you might regret. How? Do some due diligence beforehand!

1. Do what the banks do

Check each other’s credit report, income, and assets to get a better sense of how likely you both can qualify for a home loan and keep up with monthly mortgage payments. Your credit scores will not only determine the amount of loan you qualify for, they will also determine your interest rate.

Tip: get a free copy of your credit report from the three major bureaus (Experian®, Equifax®, TransUnion®) at annualcreditreport.com.

2. Lawyer up

Have an attorney draft a cohabitation agreement which outlines important details, such as the type of ownership, how you’ll both pay for ongoing expenses, and an agreed-upon exit strategy should one of you...well...exit your agreement. You’re able to divide the property however you want, as stated within the document. Its purpose is to protect both parties and to help avoid having a court decide on divisions of assets or support payments.

3. Prepare for the worst

Come up with a financial backup plan if one or both of you were to temporarily lose a job for example. Understand how you can afford your mortgage payment.

It may require going as far as taking out a term life insurance policy on each other – enough to cover the mortgage in the event that one owner dies. Make sure to speak with an insurance expert to find out what works best in case the unforeseen happens.

If you don’t have a plan in place, be sure to contact your mortgage lender immediately to let them know you cannot make the payment. If you sit back and ignore it, you risk defaulting on your mortgage — or worse — you could face foreclosure proceedings.

3. When the time comes to sell…

What happens if one owner wants to sell and the other doesn’t? According to realtor.com, when co-owners want to sell their interest in the house, they aren't required to sell to someone approved by the remaining co-owners. However, a co-ownership agreement can grant the remaining co-owner the right of first refusal. Protect yourself and your share by taking the time to document how to handle this situation.

Buying a house with someone has lots of benefits: it may be easier to qualify for a home loan, you get to split all your monthly expenses, you benefit from growing home equity, and the interest you pay on the mortgage is tax deductible. Not to mention the obvious — unlike renting, you and your friend will be homeowners! Yes, there will be challenges. But as long as you’ve found the right roomie, the homeownership journey will be no sweat! And when you’re ready, American Financing will be here to guide you guys through that financing part of the journey. 

Ready to get started? Find a loan program that fits your budget.
find a loan program