How Much Does It Cost to Buy a House With a Friend
Compared to previous generations, millennials are less likely to own a home with their family . This may have something to do with the fact that the average millennial is saddled with nearly $93,000 in debt . And according to CNBC , homes won’t get much more affordable; we can expect strong prices in the seller’s market to continue in 2022.
So more and more people in their 30s are finding a way to make home ownership possible for their generation: shopping with friends. Taking out a mortgage with friends is both a legal and often practical investment (as long as you carefully weigh the risks – more on that below). Aside from an already daunting down payment, signing a mortgage with friends can turn a lot of out-of-reach homeownership expenses into a real possibility.
Why you might want to buy a house with friends
The most terrible costs of buying a house naturally became more feasible when they were divided between two, three, or any number of friends. Not only will you be able to afford a higher down payment, but you will also increase your overall purchasing power . In addition, by pooling resources, you and your friends increase your chances of getting a loan and getting approved for a mortgage. Your combined income may also result in better terms for your mortgage.
In addition to the benefits of cost-sharing, I could write a passionate defense of (1) the benefits of living together, (2) the need to prioritize adult friendships, and (3) the uniquely American view that home buying is something low-key. only for married couples. As more friends buy houses together due to financial need, I hope we begin to normalize life situations that aren’t solely based on wedding vows. For now, let’s continue to focus on the financial aspects of buying a house together between friends.
Two types of joint ownership
Your breakdown of costs will depend on the type of joint property you are setting up. There is a shared lease , which in its simplest definition allows you and your friends to share ownership of a property, even if your shares are unequal in size. For example, you can own 50% of the property, and two friends each own 25% (although physically everyone has equal rights to the property).
On the other hand, in a joint lease , all co-owners own equal shares of the property. Most married couples are joint tenants. Apart from the division of shares, the main difference between common tenants and joint tenants has to do with the right of succession. For example, if one of the members of a shared lease dies, the other owners do not automatically inherit the deceased’s share of the property. You should consult with a professional lawyer to decide which type of joint ownership is right for your situation.
Joint ownership costs
The cost of buying a home largely depends on where you live. The 2021 example highlighted in the NBC report features a group of three people in Tennessee whose $315,000 mortgage is due in 30 years. Below are some general cost considerations for those looking to buy their first home together.
It can be difficult to even know where to start when it comes to saving money for a house. To get started, use an online calculator to calculate your monthly mortgage payments. We recommend aiming for a home that costs less than what the calculator suggests – better safe than sorry.
Investopedia has a general rule that says you can afford a mortgage that is 2-2.5 times your gross income. Another way to look at it is the 30/30 rule , which says that your mortgage should not take up more than 30 percent of your gross income. Again, the most obvious benefit of getting a mortgage among friends is the much higher collective income.
How to share the cost of a house
After establishing the terms of your co-ownership (in writing!), you must document how you plan to split the start-up and running costs. After all, buying a house with friends has more benefits than just sharing the price. Some examples of other expenses that you will share as co-owners:
- upfront costs. The largest amount will be your down payment, which is usually recommended to be around 20 percent, but can be as low as three percent of the purchase price. Your down payment does not include closing costs, which will be between two and five percent of the home’s value.
- Monthly mortgage payments. Once you know the price of the house, the down payment, and the term of the loan, you can use an online calculator like this one to calculate your monthly mortgage.
- Property tax. They can vary greatly depending on your location . You can 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 homeowner insurance in 2020 was $1,249 per year, or $104.08 per month.
- Utilities. If you’ve ever had roommates, you’re pretty familiar with splitting the costs of electricity, gas, and Wi-Fi.
- Maintenance. If you were only a tenant before, your landlord usually took care of the maintenance costs. American Family Insurance suggests using the square foot rule to estimate often unpredictable maintenance costs. The budget is about 1 dollar per square meter of living space. So a 2,500-square-foot home would require a budget of $2,500 per year, or about $209 per month.
The list above is not exhaustive, but it’s still a good starting point for considering upcoming expenses, which become more feasible when shared among a group of friends. Here is a more detailed list of hidden costs for homeowners .
Additional tips for co-owners
The expectations, risks, and responsibilities of co-owners look a little different when you don’t necessarily agree to live together forever (compared to a newlywed couple). For this reason, you need to have a clear exit plan in place in case one of the co-owners decides to move out, leave, or take over the house to start their own family.
Every credit score matters
Applying with friends may mean you qualify for a larger mortgage. At the same time, remember that the credit score of each individual buyer will affect the group. Houser explains that your mortgage rate will be based on the group’s lowest credit score; lenders will not seek to average your scores together to determine your rate. If one friend has credit problems before you buy it, it could negatively impact all of your monthly payments.
Likewise, all your credit reports will be attached to your mortgage, so you only need to walk into the house with someone you trust to make sure your payments are always on time.
The moving factor
When it comes to your exit strategy, the difference between shared and shared rentals comes into play. Shareholders may individually sell their share of the property without the consent of their co-owners. It can be an advantage to ensure that you can withdraw from the agreement at any time; on the other hand, you risk getting a co-owner who suddenly leaves you in the dust.
Joint tenants are also allowed to sell their shares, but when they do so, the joint lease ends and becomes a shared lease.
What to discuss before buying a house with friends
Considering all the costs and considerations above, here is a short list of topics to discuss with your potential co-owners:
- Group total income
- Down payment and expected start-up costs
- Monthly mortgage expectations
- Individual credit ratings
- Individual debt
- Individual Savings
- Ideal type of co-ownership
After agreeing on all the details of your decision, make sure you have a formal written agreement to buy together. Obviously, buying a home is not a frivolous commitment, so think about all the financial and interpersonal risks before agreeing to buy a home with your friends.