When you’ve got your mind set on buying a home, one of the first things you have to ask yourself is: can I really afford it? After all, you’re committing to making a mortgage payment for the next three decades, so there’s no room for doubt.
If you’ve crunched the numbers and found that you’re coming up a little short, you don’t have to give up on the idea of buying altogether. Sharing a mortgage–and a home–with a friend or family member is another path to homeownership.
Taking on a mortgage jointly with someone other than a spouse isn’t that different from buying a house on your own but there are some special considerations to keep in mind. If you’re interested in exploring this option, I’ve got some insight into what you need to know before diving in.
Mortgage sharing: How it works
Sharing a mortgage is similar to sharing a lease agreement for a rental except you both have an ownership interest. Both of your names appear on the loan and you’re both equally liable for paying the mortgage. When you go through the application process, you both have to meet the minimum credit score requirements and share your personal financial details, such as how much money you make, what you’ve got stashed in the bank and how much debt you’re carrying.
As far as your credit scores, you should be aware that the lender will use the lower of your two scores when making the final approval decision. Before you apply, you and your co-buyer should sit down and have an honest discussion about your credit and finances in general. You don’t want to get too deep into the underwriting process and find out that they’ve got a bankruptcy or a previous foreclosure on their credit.
You should also keep in mind that even though the mortgage is a 50/50 split, ownership of the home doesn’t necessarily have to be. For example, let’s say you’re buying a home with one of your siblings but you’re putting up more money towards the down payment. In that scenario, you could specify in the deed how much of an ownership stake each of you has in the home. For instance, you could share it 60/40 or 70/30, based on how much money you put into it initially.
Getting out of a mortgage-sharing arrangement isn’t easy
A mortgage loan is a legally binding document and when you sign your name to it, you’re assuming responsibility for making the payments. So what happens if you or the person you bought the home with decides the arrangement’s no longer working or you’re ready to move into a home of your own?
You could try asking the bank to take your name off the loan but that’s really a longshot. If the bank is willing to agree, the person you’re sharing the mortgage with would have to prove that they have the means to pay the loan themselves. In most cases, the other buyer would have to refinance the loan completely to have your name removed. If you simply decide to move out or sign a quitclaim deed, that’s not going to absolve of you any responsibility towards the loan.
If you were to try and buy another home at some point, the first mortgage loan would still show up on your credit as long as it’s in your name. That would affect your debt-to-income ratio, possibly keeping you from qualifying for a new loan if it’s too high.
Do your research before you commit
Mortgage sharing isn’t something you can jump into without putting some thought into it. Here’s what you should be doing before signing off on a joint loan:
- Be clear about your finances. I touched on this earlier but it’s worth mentioning again. You and the person you’re planning to buy a home with need to be as transparent as possible about your financial details. You should have an idea of what your credit scores look like, how much debt each of you owes and how that compares to your income. Last-minute surprises could put the kibosh on your home purchases if you’re not prepared.
- Discuss your long-term goals. While you’re chatting about your finances, you also need to discuss the bigger picture in terms of where you each see yourselfs in 10 or 20 years. For example, if one of you is hoping to advance in your career and there’s the possibility that a move may be necessary, you’d need to factor that into your plans. In other words, ask yourself if you could sustain the mortgage solo if the other owner jumps ship.
- Set your expectations. There are two different layers to this one. First, there are your financial expectations. You want to talk about things like how much each of you will put towards the down payment, how you’ll split the mortgage and how you’ll cover the cost of repairs and maintenance. Besides that, you also need to set the ground rules for living in the home. Will all the common areas, such as the kitchen or living room, be shared equally? Who’s going to do the cooking and cleaning? How will you split the cost of utilities and groceries? These are details you need to work out before you start moving your things in.
- Have a contingency plan. If one of you does decide to bail at some point, there should be a plan in place for dealing with it. For instance, you could create a co-ownership agreement that stipulates how much notice you’re required to give before you move out or whether you’re expected to buy out your share of the loan. Bottom line, the more planning you do in advance for the worst-case scenario, the easier it’ll be to deal with if it becomes a reality.
What is your contingency plan for purchasing a house?