This blog post was written by HUECU mortgage expert Michael Levine.
The current real estate market continues to make it challenging for an individual to purchase a home by his or her self. Higher property prices increase the minimum down payment required and the higher interest rates result in higher monthly mortgage payments.
A prospective buyer with a spouse, partner or significant other as a co-buyer may have the advantage of a second means of income and possibly a second means of down payment funds. The additional income and down payment funds will likely enhance the chances of the two people together qualifying for a mortgage loan.
An individual without a co-buyer may have the opportunity to receive a family gift for down payment funds. However, that option may not be available to most buyers and may have tax implications. Anyone in the position to pursue this option should seek professional advice.
Another option one may consider is purchasing a property with a friend. This option is somewhat unconventional, has both advantages and disadvantages and they are detailed below:
- Increasing the potential purchase price – by combining their assets, the two individuals together will likely be able to afford a property in a higher price range, as opposed to buying individually.
- Increases the chances of obtaining a mortgage – the second means of income will likely increase the amount of a mortgage for which the two buyers will qualify.
- Avoiding mortgage insurance – when making a down payment of less than 20.00%, lenders will typically require mortgage insurance (“PMI”), resulting in an additional portion to the total monthly payment. Having a co-buyer may result in avoiding mortgage insurance. If not, it can result in a lower PMI payment.
- Sharing costs – in addition to the down payment amount, a buyer will also need funds for closing costs, which are payments to third parties working on behalf of the buyer and lender. The actual costs will depend on the purchase price and loan amount, but buyers should anticipate it being in the range of $6,000 to $8,000. After purchasing the property, there will be ongoing expenses, such as utilities and maintenance expenses. Having a co-buyer allows for them to be shared, as well.
- Increase the ability to save – having a significant housing expense will likely limit one’s ability to accumulate funds in savings. However, having a co-buyer to share the monthly payment and other expenses should enhance the ability to save.
- Benefit from the company of a friend - for someone who is unable or not comfortable living alone, having a co-buyer can help alleviate that concern.
While there certainly are advantages of purchasing with a friend, there are also a number of disadvantages, which are detailed below:
- Credit Scores – with some lenders, the interest rate and other factors related to the loan are a function of the borrowers’ credit scores. Having a co-buyer with a less than satisfactory credit score may result in an increase to the interest rate.
- Possibility of Default – from the lender’s standpoint, both buyers are “joint and severally liable.” That means both borrowers are equally responsible for repayment of the entire loan, as opposed to each being responsible for fifty percent. In the event of one borrower being unable to contribute their share of the payment, the other borrower will remain responsible for the full amount due.
- Moving out of the Property– people’s life circumstances can certainly change and one borrower may decide that they no longer wish to live in the property. Should this occur, they will continue to be responsible for repayment of the mortgage. The other borrower can try to refinance the mortgage in their name only. However, they will need to have sufficient income to qualify and would likely have to reimburse the other borrower for their share of equity in the property.
- Changes in Relationship – it is likely that two individuals purchasing a home together have a mutual respect for one another and are confident in their ability to live together and share expenses. However, changes in circumstances can affect their ability to co-exist, with a possible outcome being the need to sell the property and go their separate ways.
When buying a home, “conventional wisdom” suggests that one consider the fact that they are also investing in an asset and that they look at it as a long-term investment. Buying a home with a friend will likely satisfy one’s immediate goal of acquiring real estate. However, if the property is held for a short-term basis, one must hope that there has been enough appreciation in the value to recover their initial investment, as well as enough “profit” to allow them to re-invest in another property.