Compared to previous generations, millennials are less likely to own a home with a family of their own. This might have a little something to do with the fact that the average millennial is burdened with nearly $93,000 in debt. And according to CNBC, houses aren’t about to get much more affordable; we can expect to keep seeing the high prices of a seller’s market in 2022.
So, more and more people in their 30s are finding a way to make home ownership a possibility for their generation: buying with friends. Entering a mortgage agreement with friends is both a legal and often practical investment (as long as you carefully weigh the risks–more on that below). Beyond the already daunting down payment, signing a mortgage with friends could turn a slew of out-of-reach costs of homeownership into a real possibility.
Why you might want to co-buy a home with friends
The scariest costs of buying a house naturally became more feasible when divided between two, three, or however many friends. Not only would you be able to afford a higher down payment, but you’ll be able increase your overall purchasing power. Plus, by pooling resources, you and your friends boost your odds of qualifying for loans and being approved for a mortgage. Your combined income could also lead to better terms for your mortgage.
In addition to the advantages of splitting costs, I could write a passionate defense of (1) the perks of communal living, (2) the need to prioritize adult friendships, and (3) the uniquely American perspective that buying a home is something reserved only for married couples. As more friends buy homes together out of financial necessity, I hope we begin to normalize living situations that aren’t based solely around wedding vows. For now, let’s continue to focus on the financial aspects of co-buy a home between friends.
Two types of co-ownership
Your cost breakdowns will depend on the type of co-ownership you establish. There’s tenancy in common, which in its most basic definition allows you and your friends to share ownership of a property, even if your shares are unequal in size. For instance, you could own 50% of the property, while two friends own 25% each (although everyone has equal rights to the property physically).
In joint tenancy, on the other hand, co-owners all hold equal shares of the property. Most married couples are joint tenants. In addition to the division of shares, the major difference between tenants in common and joint tenants has to do with survivorship rights. For instance, if someone part of a tenancy in common passes away, the other owners don’t automatically inherit the deceased’s interest in the property. You’ll want to consult a legal professional to decide which type of co-ownership is right for your situation.
The costs of co-homeownership
The cost breakdown of buying a house will largely depend on where you live. A 2021 example covered by NBC report featured a group of three in Tennessee whose $315,000 mortgage is scheduled to be paid off in 30 years. Below are some general cost considerations for anyone looking to co-buy their first home.
It can be daunting to even figure out where to begin when it comes to putting down money for a home. To start, use an online calculator to determine your monthly mortgage payments might be. We recommend aiming for a house that costs less than what the calculators suggest—better safe than sorry.
Investopedia has a general rule that says you can afford a mortgage that is two to 2.5 times your gross income. Another way to look at it is the 30/30 rule, which says that your mortgage shouldn’t take up more than 30 percent of your gross income. Again, the most obvious benefit of tackling a mortgage amongst friends is a much higher collective income.
How to split the cost of a house
After establishing the terms of your co-ownership (in writing!), you should document how you plan to split both upfront and recurring costs. After all, buying a home with friends has more benefits than simply splitting the listing price. Some examples of other expenses you’ll divvy up as co-homeowners:
- Upfront costs. The most overwhelming cost will be your down payment, which is widely recommended to be around 20 percent but can be as low as three percent of the purchase price. Your down payment doesn’t include closing costs, which will be around two to five percent the price of the home.
- Monthly mortgage payments. Once you know the home price, down payment, and loan term, you can use an online calculator like this one to determine your monthly mortgage.
- Property taxes. These can vary wildly depending on your location. You might pay $5,000 in property taxes on a $250,000 home in New Jersey, or the same amount in taxes on a $750,000 home in Alabama.
- Homeowners insurance. Market Watch reports that the average cost of homeowners insurance in 2020 was $1,249 per year, or $104.08 per month.
- Utilities. If you’ve ever had roommates, you’re well-acquainted with splitting electricity, gas, and WiFi costs.
- Maintenance. If you’ve only ever been a renter before, maintenance costs were usually handled by your landlord. American Family Insurance suggests using the square foot rule to estimate often unpredictable maintenance costs. Budget about $1 for every square foot of livable space. So, a 2,500-square-foot home would require a $2,500 budget annually, or about $209 per month.
The above list is not exhaustive, but is still a good starting point for considering the looming expenses that are made more feasible when divided amongst a group of friends. Here’s a more detailed list of hidden costs for homeowners.
More considerations for co-owners
The expectations, risks, and responsibilities for co-homeowners look a little different when you aren’t necessarily agreeing to live together forever (compared to a pair of newlyweds). For that reason, you’ll want to outline a clear exit plan for if one of the co-owners chooses to move out, move away, or take over the house to start their own family.
Every credit score matters
Applying with friends could mean you qualify for a larger mortgage. At the same time, remember that every individual buyer’s credit score will impact the group. Houwzer explains that your mortgage rate will be based on the lowest credit score of the group; lenders won’t be keen on averaging your scores together to determine your rate. If one friend has credit problems before you buy, then all of your monthly payments could be negatively affected.
Likewise, all of your credit reports will be attached to the mortgage, so you only want to go in on a home with someone you trust to always make their payments on time.
Factor in moving out
When it comes to your exit strategy, the difference between tenancy in common and joint tenancy comes into play. Tenants in common can individually sell their share of the property without consent of their co-owners. This could be an advantage to ensure that you can exit the agreement at any time; on the flipside, you risk a co-owner who suddenly leaves you in the dust.
Joint tenants are also allowed to sell their interests, but when they do, the joint tenancy ends and turns into a tenancy in common.
What to discuss before buying a house with friends
Given all the costs and considerations outlined above, here’s a quick list of talking points to discuss with your potential co-homeowners:
- The group’s gross income
- Down payment and upfront cost expectations
- Monthly mortgage expectations
- Individual credit scores
- Individual debt
- Individual savings
- Ideal type of co-ownership
After settling all the details of your decision, make sure you create an official, written co-buying agreement. Obviously, buying a home is not a commitment to make lightly, so consider all the financial and interpersonal risks before you agree to buying a house with your friends.