By Alena KairysFeb 27, 2021
Owning a home is a life goal for many people, and luckily, homeownership doesn’t look the same across the board. Unless you’d rather live by yourself, co-owning a home can help you build equity and make homeownership more affordable. You can co-own a home with your partner, a friend (or group of friends), or a family member. If you’re considering buying a home with someone else, read up on these important homebuying tips to co-owning a home.
Get Credit Scores in Order
Before you start house-hunting, check and compare your credit scores. Your credit score is an important factor when applying for a mortgage, so the healthier your score, the better. If everyone wants to be on the mortgage, keep in mind many lenders will take the average score from each person and consider the lowest number. If one of you has a significantly different credit score, the person with the higher score can apply under their name, but only that person’s name will be on the mortgage. This arrangement can work for some people, but you should always talk to the involved parties and understand the risks. Regardless of how you all plan to apply for the loan, it’s always a smart idea to improve your credit score through healthy financial habits.
In addition to looking over your credit scores, lay out how much and what kinds of debt you have. The amount of debt you have will impact your debt-to-income ratio (DTI). Your DTI will affect how much money you have left over from paying your existing debts to your mortgage. It may be more difficult to obtain a home loan with a higher DTI. Having a handle on your individual finances will make the preapproval process easier, too.
Know Who Will Pay the Mortgage
A discussion about how you’ll pay the mortgage is a vital one to have. Sit down and have a frank conversation about who and how much you’ll be contributing to the mortgage. Will you split the cost equally or proportional to your earnings? Should one person pay the mortgage but the other will cover utilities and property taxes? Since each person and situation is different, there is no “right” way to contribute to the household, but talking about it now will help prevent resentment or house troubles down the road. You should be aware that whoever’s name is on the mortgage will be legally responsible for making payments. Therefore, if only one person’s name is on the mortgage but a payment isn’t made, that person’s credit will be affected.
Agree on Ownership
When you buy a house with someone else, there are different types of ownerships you can have on the home’s title. The most common include sole ownership, joint tenancy, or tenants in common. Depending on which one you choose, it will have different conditions on what percentage of the property you legally own and are responsible for, and how the property will be handled if the relationship dissolves. Sole ownership is when one person owns 100% of the property and can be inherited by that person’s heirs. Joint tenancy is when property ownership is evenly or unevenly split amongst the home’s inhabitants. This type of ownership includes a right of survivorship, where if one person dies, the other will inherit the other portion of the property rights. Also, one co-owner can’t sell their share of the home without the other’s permission. Tenants in common is similar to joint tenancy in that you can divide the ownership, but it allows the property share to be inherited by whomever is specified in your or another person’s will. Be sure to consult a real estate lawyer for more information.
Have a Backup Plan
Even though buying a home together is usually a sign that you have a good relationship, it’s possible you’ll find you aren’t happy living with your housemates, let alone owning property together. It’s a wise idea to form a cohabitation contract before you buy a home. A cohabitation contract is like a prenuptial agreement, but without the “nuptial” part. It lays out how issues of property, debt, income, and healthcare will be dealt with during your occupancy. It also includes how the property and mortgage will be handled in the event of a break-up, disability, or death. While most states recognize cohabitation agreements in some capacity, some do not—always consult with a lawyer who can advise you on the state and local limitations of this contract. Suggesting a contract doesn’t mean you don’t trust them or have faith in the relationship; you need to plan for the unplanned.
The ways in which people are buying homes may be changing, but the value people place on owning a home has not. Buying a home with another person is an emotional and financial commitment. When you’re on the same page financially, you can have more confidence in becoming co-homeowners.
If you have any questions about the home buying process, contact one of our licensed Mortgage Loan Originators. If you are ready to begin the home buying process, click here to get started!
These blogs are for informational purposes only. Make sure you understand the features associated with the loan program you choose, and that it meets your unique financial needs. Subject to Debt-to-Income and Underwriting requirements. This is not a credit decision or a commitment to lend. Eligibility is subject to completion of an application and verification of home ownership, occupancy, title, income, employment, credit, home value, collateral, and underwriting requirements. Not all programs are available in all areas. Offers may vary and are subject to change at any time without notice. Should you have any questions about the information provided, please contact us.