How To Buy a House With a Friend

A Guide To Buying a House With a Friend

Couple meeting with a real estate agent
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While some friends come and go, others are in it for the long haul. When you find one of those lifers, it can make sense to combine important aspects of your life—such as buying property together.

Maybe you plan to live together in the house as your primary residence, or perhaps you want to buy a shared vacation home. Whatever the case may be, there are a variety of pros and cons to consider before buying a house with a friend.

Key Takeaways

  • Buying a house with a well-qualified friend can increase your purchasing power.
  • You'll need to decide together on the type of title that best suits your needs.
  • Experts recommend getting a legal contract outlining your financial ownership and responsibilities.
  • However, potential downsides include the risk of a fallout with a friend and a complicated financial situation that could hurt your credit.

Should You Buy a House With a Friend?

Buying a house with a friend can be a great idea. However, it's important to enter the agreement with caution.

"One of the biggest problems with buying a house with a friend is that friends don't always last forever," Martin Boonzaayer, CEO of The Trusted Home Buyer, told The Balance via email. "If something happens, like the friend moves, there is a conflict with the house. While this can be resolved relatively easily with roommates renting a space, it's not so easy with an owned house."

Before you start scheduling walk-throughs, take a closer look at the advantages and drawbacks of buying a home with a friend.

The Pros and Cons of Buying a House With a Friend

Pros
  • Boost your purchasing power

  • Skip mortgage insurance

  • Start building equity

  • Split living costs

Cons
  • Open yourself up to risk

  • Increase your debt-to-income ratio

  • Consider problems down the road

Pros Explained

  • Boost your purchasing power: Buying a home with a friend has the potential to expand your purchasing power. You can combine resources to qualify for a larger mortgage than either of you could get alone, which could help you afford a more expensive property. However, your credit scores and incomes will also affect how much you qualify to borrow.
  • Skip mortgage insurance: Private mortgage insurance (PMI) is required if your down payment is less than 20% of your home's purchase price. It protects the lender in case you stop making payments and can range from 0.5% to 6% of the purchase price. However, joining forces with a friend could help you be better equipped to put down at least 20% and avoid the extra expense of PMI.
  • Start building equity: If you want to buy a house with someone else but don't have a spouse and don't want to wait, partnering with a carefully chosen friend may be a good solution. It can help you start building equity rather than spending money on rent each month.
  • Split living costs: In addition to splitting the cost of your down payment and monthly mortgage payment, you and your friend could share other expenses associated with owning a home, such as electricity, gas, trash, water, and repair bills.

Cons Explained

  • Open yourself up to risk: One of the downsides to buying a house with a friend is that you open yourself up to risk. You'll both be on the mortgage, so if your friend can't pay, you will be left with the full responsibility to make the mortgage payments.
  • Increase your debt-to-income ratio: Your debt-to-income ratio (DTI) shows how much debt you have compared to your income. The higher it is, the harder it can be to get approved for financing. That's why it's important to think about how buying a home will impact your DTI—and, therefore, your ability to borrow for other purchases in the future.
  • Consider problems down the road: While you may have thought through all the details about qualifying for and splitting the mortgage, it's important to consider how to handle survivorship and inheritance issues. These can be difficult conversations to have, but it's best to get them out of the way before entering a contract together.

While both of you may enter the agreement with the best intentions, unforeseen events happen—one of you could lose your job or face a medical emergency. It's important to think about what you would do in that scenario, such as refinancing, selling, or renting out rooms.

How Buying a House With a Friend Works

If you decide that buying a house with a friend is the right move for you, what comes next?

Find the Right Lender

As with any loan, it's important to do your homework to find the best lender. Shop around and review the loan products available from different lenders while also vetting reviews from past borrowers. Look for a lender that offers loan products that suit your needs, competitive rates and fees, and positive reviews.

Apply Together

To buy a home with a friend, you'll need to apply to your chosen lender together. Lenders will typically use the lowest credit score to evaluate your application. As long as your combined income is enough to cover the payments, the application can be approved no matter which applicant earns more. You should get pre-approved so that you know upfront how much house you can afford and to show sellers you're serious.

Discuss the Details

It's also a good idea to sit down and hash out the details of homeownership with your friend before you start looking at houses. Topics to discuss include:

  • How you'll pay the down payment and closing costs
  • How you'll split the mortgage payments and where they'll come from (such as a joint bank account)
  • How you'll handle the costs and responsibilities of home insurance, maintenance, and repairs

Put Everything in (Official) Writing

Next, create a legally binding agreement that will help protect both parties in case of future disagreements or issues.

"If this sounds like a prenup, that's because it pretty much is," Boonzaayer said. "Being married is an agreement to share financial responsibility in the future, the same as owning a house together. If an aspiring homeowner does not like the sound of that, I highly recommend they not buy a house with a friend."

Choose Your Title Type

You and your friend will also need to decide what type of title you want for the property. The two common types used in this scenario are joint tenancy and tenancy in common.

With joint tenancy, all owners have equal rights and responsibilities—they both own the whole property. Joint tenants also have a right to survivorship. That means if you pass away, your friend becomes the sole owner, and vice versa.

Tenancy in common provides each person with a fractional interest in the property (which does not have to be equal). Either owner can sell their share without the permission of the other. Further, there are no automatic survivorship rights. When you pass away, your interest in the property will go to your estate or your heirs.

The title type you choose will have an impact on what happens with the property down the road, so it's important to carefully consider your options. It's also a good idea to consult a real estate attorney for advice specific to your situation.

Shop for Your House

Next, look for a house that meets your and your friend's needs and wants. After getting pre-approved, you'll know how much you can afford so you can make sure you're looking at homes in your price range. Once you find the one, you two can submit an offer.

Including a home inspection contingency with your offer will give you the ability to back out of the deal or require the seller to fix any serious problems before you commit.

Close the Deal

If your offer is accepted, you and your friend will go through the closing process together. You will both need to sign the paperwork as co-borrowers and you will both be responsible for ensuring the mortgage is paid in its entirety.

What To Expect During the Closing Process

The closing process occurs between the time your offer is accepted and the moment you and your friend get the keys. Closing involves a variety of steps, which can include:

  • Open an escrow account to hold the money and documents during the closing process
  • Deposit earnest money
  • Perform a title search to ensure it has no claims
  • Purchase title insurance to protect against title defects
  • Hire a real estate attorney to create a contract for you and your friend, and to protect your interests in the sale
  • Negotiate closing costs and ensure there are no hidden fees
  • Get a home inspection
  • Get a pest inspection
  • Renegotiate the offer if necessary
  • Deposit all necessary funds into escrow
  • Do a final walk-through
  • Read through the paperwork and sign it if all is acceptable

The length of the closing process will depend on whether you come across any problems such as undisclosed water damage, title claims, or pests. Purchase closings took an average of 50 days in September 2021, according to Ellie Mae's "Origination Insight Report."

Be sure to do your due diligence and make sure all your i's are dotted and t's are crossed. A real estate attorney can help ensure both your interests are protected.

The Bottom Line

Buying a house with a friend can help you expand your purchasing power and buy a home sooner than you could alone. However, it's not without risks. Before you start shopping, you and your friend should have an honest conversation about all aspects of your finances and credit histories. Additionally, make sure to cover the what-if scenarios and how you would handle them.

If you're on the same page and want to move forward, don't forget to outline the various aspects of your agreement in a legally binding contract. While you may be friends and trust each other, a contract is a good step for any long-term business deal.

Frequently Asked Questions (FAQs)

How do you protect yourself when buying a house with a friend?

Before buying a house with a friend, perform your due diligence to understand their finances and any potential challenges (such as debt or poor credit). Also, talk through the various aspects of homeownership to ensure you're both on the same page.

If you move ahead, "I highly recommend contacting a lawyer to create legal documents that establish financial ownership and responsibilities to the house," Boonzaayer said. "There can even be agreements on how to sell the house if there is a divergence from the plan."

What questions should we ask while buying a house?

When buying a house with a friend, it's important to understand how you will manage the responsibilities and ownership of the home. To figure it out, you can ask questions, including:

  • How will you two pay for the down payment and closing costs?
  • How will you split the monthly mortgage payments and bills?
  • What will you do if one person can't make a payment?
  • Who will be responsible for sending the mortgage payment each month?
  • Will taxes and insurance be in an escrow account?
  • How will you split the costs of repairs and maintenance?
  • Do you want to have a buyout agreement in place?
  • Will you have joint tenancy or tenancy in common?

How much money should we save before buying a house?

The amount you should save before buying a house will need to be enough to cover your down payment, closing costs, moving expenses, and incidentals. Minimum down payment requirements range from 3% to 20%, depending on the loan product you choose. Closing costs typically add up to 2% to 7% of the purchase price. Moving costs range widely based on the distance and level of service involved, from DIY with a rental truck to a team of packers and movers. You should also save a few thousand dollars as a buffer in case of any unforeseen expenses.

For example, say you want to buy a home that costs $428,700, the median price in the U.S. in the first quarter of 2022. You would need to save at least $21,435—plus moving expenses and incidentals—if you put down 3% ($12,861) and spent 2% of the purchase price ($8,574) on closing costs. If you put down 20% ($85,740) and your closing costs totaled 7% of the purchase price ($30,009), you'd need to have $115,749 saved, not including moving costs.

Article Sources

  1. Texas Department of Insurance. "Private Mortgage Insurance (PMI)."

  2. Consumer Financial Protection Bureau. "What Is a Debt-to-Income Ratio? Why Is the 43% Debt-to-Income Ratio Important?"

  3. Consumer Financial Protection Bureau. "Making the Move to Homeownership on Your Own or With Someone Else."

  4. Ellie Mae ICE Mortgage Technology. "September 2021 Origination Insight Report," Page 4.

  5. Consumer Financial Protection Bureau. "How To Decide How Much To Spend on Your Down Payment."

  6. Federal Reserve Bank of St. Louis. "Median Sales Price of Houses Sold for the United States."

  7.  Entitle Direct Insurance. "The Smart Consumer's Guide To Reducing Closing Costs," Page 4.