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Buying a home is a common milestone in a person’s life. But it’s also one that many people don’t cross alone. After all, a home is an enormous expense that might just be too much for many individuals.
It’s very common that spouses purchase a home together, but do you have to be married to someone to be joint owners of a home? What if you want to buy a house with a friend, sibling, or significant other you aren’t married to?
The short answer is yes, you can buy a house with someone else. It’s not that different from buying a home yourself, except relationship dynamics will always come into play. In this piece, we’ll discuss how to buy a house with a partner, a friend, or family member and what you should take into consideration if you plan to go this route.
Can you buy a house with someone else?
Yes. There are many different ways to have an ownership stake in a property, including allowing any number of people to partner for a purchase. As long as each owner can contribute to the mortgage and all parties can agree on how to manage the property, you’re good to go. Still, there are things to consider when purchasing a home with someone else.
Buying a house with an unwed partner
Millennials are getting married later than previous generations, but that doesn’t mean they’re also waiting to purchase property. One Coldwell Banker study found that 25% of unwed millennial couples had bought property together. It makes sense: Rent is high in many parts of the country and home prices continue to rise. If you have the opportunity to buy now, why wait for a wedding?
The home buying process stays the same whether you and your partner are married or not. The differences come during home ownership. For instance, married couples can file their taxes jointly and claim a higher mortgage tax interest deduction, which unwed couples cannot do. Likewise, married couples can claim a $500,000 capital gains tax exclusion if they sell a property that they jointly own. However, if both unwed owners qualify for the tax, they can each claim up to $250,000 on their individual tax returns so it’s not a very significant difference.
While buying a home with an unwed partner isn’t all that different from buying with a spouse, there are some personal items to consider.
Consider who holds the title
Ownership terms often assume a married partnership between homeowners, which is why it’s important to understand how the different forms of co-tenancy function. These are: joint tenancy and tenancy in common.
Joint tenancy gives each homeowner equal property shares and comes with some strict rules governing Right of Survivorship and financial responsibility. With tenancy in common, you can divide property shares equally or unequally and leave each share to an individual’s heirs rather than passing to the remaining co-owner.
Joint tenancy is common among married couples. With unwed couples, it’s a little more complicated. When two (or more) people hold a title, each can own a different percentage of the house depending on how much they’ve contributed to the equity in the home. That’s straightforward, but it gets tricky if tragedy strikes.
Consider this scenario: A widow buys a home with her new boyfriend, who has two adult children, and they opt for tenancy in common. They aren’t married but they split everything equally, including the down payment and each mortgage payment. If her new boyfriend dies, his share of the house passes to his designated heirs, most likely his adult children. While the widow still owns her half of the house, she may not be legally allowed to continue living there unless she can reach an agreement with her deceased boyfriend’s children. If both parties can’t reach an agreement, a court might order the home sold, splitting the proceeds among the co-owners.
The difference here is that if you’re in a joint tenancy, the title will pass to you rather than someone else’s designated heirs. If you’re purchasing a home with an unwed partner, talk to an attorney to figure out how to do it in your area to avoid this scenario.
The other alternative (besides marriage) is one person holding the title alone. That means one person owns the home and the other is functionally paying rent. That’s not ideal for most couples, but it can be a plus if one partner is saddled with student debt or has a low credit score that results in a higher mortgage rate or lowers the amount for which a bank will approve a mortgage.
Decide how to split costs
Most unwed couples don’t have joint bank accounts. If you do, great! Figuring out how to split costs won’t be a problem. If you don’t, you’ll have to lay out all of the costs associated with buying and owning a home to figure out who pays for what. Splitting it all 50-50 may not be feasible.
Buying a home requires a significant down payment, up to 5% of the home’s purchase price in closing costs, as well as initial mortgage insurance and property tax payments. When you own the house, you’ll have to figure out how to split the monthly payment as well as utility and maintenance costs.
Each person probably makes different amounts of money, so someone who earns a higher regular salary may find it’s easier to pay a larger portion of the mortgage each month. The other may have more savings, so they can contribute more to the down payment.
You want to avoid raising any “who contributes more” or “who owns more of the house” questions, so it’s important to communicate your expectations and desires with one another.
What to do if you break up
Just because you aren’t married doesn’t mean a jointly owned home won’t be the focal point of a breakup. Before you buy a home together, you’d be well served to sit down with an attorney and strike a legal agreement that outlines what happens in all of the most unfortunate potential outcomes.
That document should address the issue of buying one another out in the event of a breakup, and how to resolve the matter if you both want the house. A contract might automatically give one of you the right to buy out the other at fair market value within 90 days. Maybe a coin toss is enough. Of course, who is contributing more financially should inform all of these conversations.
A pre-purchase contract shouldn’t just address ownership title, though. You still have to pay a mortgage. Taking your name off the title doesn’t do anything if you co-signed a mortgage. As long as both partners’ names are on the mortgage, both partners will be impacted by one’s failure to pay the mortgage on time. If one partner suddenly stops paying, the other partner is still responsible and can see their credit impacted.
In that legal document, come up with an agreement that if the relationship dissolves, the home will be refinanced in one partner’s name, removing the other’s. Decide who pays the refinancing costs and, if one partner can’t afford the house alone, put in writing an agreement to sell the house to a third party within a fixed period of time.
Buying a house with a friend or family member
Buying a home with a friend or family member comes with the same rules and risks as when you buy with an unwed partner. You can get more purchasing power upfront, split your monthly payments, and take the first step towards one of the biggest investments of your life. That doesn’t mean it’s all sunshine and daisies, though. Here’s what to consider.
Understand everyone’s financial situation and duties
You can buy a home with as many friends or family members as you’d like. But just like when you buy with a partner, you have to consider who will hold the title and who will co-sign the mortgage.
Every mortgagee’s credit score matters, which means even one bad credit score could hurt your mortgage terms. Likewise, if one friend or cousin finds they can’t keep up with their share of the payments, it will hurt everyone’s credit scores.
Additionally, the bank views each person as responsible for the mortgage. Here’s what that might mean in practice:
- Say you’ve reached an agreement with your two cousins that they’ll pay more of the mortgage now because you’re still paying off student loan debt.
- You still want to be a co-signer, but to the bank, your debt-to-income ratio (DTI) is a detriment to your two cousins’ financial situations. That’s because each of you is equally responsible for the mortgage, so failure for one of you to pay on time can impact everyone’s credit scores.
- That’s a red flag to a bank and may cause them to only approve a lower mortgage amount than your two cousins could get on their own.
- Worse yet, if anyone does fail to uphold their contribution, it looks very bad for all of you if you ever apply for future loans.
It’s a lot of work to own a home, especially an investment property. Just like you would with a partner, write down how you will split responsibilities. How will you handle the financial responsibilities, and who will be in charge of utilities, repairs, and other costs? Put everything in writing so you don’t start bickering over who owes what. It may be smart to start a joint bank account that’s only for home expenses, too.
Who lives where?
Maybe you bought a place for you and a friend to live. Maybe you bought a place with three other cousins, but only one of you lives there and the rest of you would like to rent out the house for some extra income. This is where things get tricky.
It’s fine when one of your group is living in the house and wants to stay there, but if they decide they want to move to a new place and need some money to do it, they might want to get out of the mortgage. Can just three of you handle the mortgage yourselves? Could you do it by yourself?
Homeownership comes with some heavy burdens, especially if you’re doing it on your own. Should a partner one day try to back out, you’ll have to go through a refinancing process to get the title and mortgage all in your name, and be ready to take on the financial responsibilities that come with it.
Plan for the future
That segues nicely into the final, most important point. What’s the end game? Are you going to live in the home together forever? Probably not.
You don’t necessarily need a legal document, but you should discuss what you’ll do if one of you gets a new opportunity in a new city, meets someone special, or comes into some more money. How will you handle unexpected situations?
Moreover, do you have a goal with this house? Do you want to sell it in a few years for the profit and keep buying homes together? Do you want to eventually buy another house and rent the original? It’s a lot easier to own a home with someone if you’re on the same page about how you’d like to manage it.
If you fail to communicate well, you’ll wind up back at a common theme: Regretting entering such a huge financial endeavor with somebody, which might cost you a relationship.