It’s a fact: Married couples buy most homes — 60% of them in 2022, according to the National Association of Realtors — largely because it’s easier to afford one with two incomes. But if you’re keen on buying a home and not married, teaming up with a friend can help you afford a home without waiting to find a spouse.
Here are 11 steps you need to take to buy a house with a friend.
1. Choose the Right Friend
First and foremost, you want to pick a friend you can get along with, since you’re essentially going into business together. When people buy homes with their spouse, they have already made a commitment to each other and plan to live together for the long haul. With a friend, there are different considerations. Relationship statuses can change, new jobs can take you different places, and incomes may fluctuate.
You want to pick a friend you can trust and feel like you have shared goals with. If you plan to live in the home together, you want to make sure you have compatible lifestyles. It’s also important to choose someone who has stable finances.
2. Choose a Property Type
Once you’ve found the right person, you need to agree on the type of home you want to buy together. Are you leaning more toward a traditional single-family home, or would you be open to a condo or townhouse? Each type comes with its own set of pros and cons — as well as different costs and responsibilities.
Here’s a look at some of the different perks and downsides of each home type:
House vs. Condo vs. Townhouse
|Single-family house||– More space, privacy, and control than a condo or townhouse.|
– Outdoor space.
– Not attached to another property.
– Better resale value than a condo or townhouse.
|– More expensive than condos and townhouses. |
– Full responsibility for all maintenance and repairs.
|Condominium||– Lower costs.|
– Less responsibility for repairs and maintenance.
– Amenities and common areas.
– Social opportunities.
|– Smaller living space. |
– No control of the building outside your unit.
– Homeowners association fees.
– Lower resale value.
|Townhouse||– More space, privacy, and autonomy than a condo. |
– Lower HOA fees.
– Outdoor space.
– More affordable than a single-family house.
|– Less space than a single-family home.|
– More maintenance and responsibility than a condo.
– Lower resale value than a house.
3. Review Each Other’s Finances
If you’re committed to buying a home together, then you need to fully understand each other’s finances. Looking into each other’s finances will show whether you and your friend can afford to buy a home and keep up with the ongoing cost of homeownership.
When you apply for a mortgage, the lender will verify that both applicants can afford to repay the loan. As such, it will be useful for you to review the documents that your lender will verify, which include:
- Income (W-2s, 1099s).
- Credit scores.
- Credit utilization ratios.
- Savings and other assets.
- Any major red flags, like a bankruptcy.
4. Decide How To Split Ownership
You also need to decide how to split ownership of the home. The two main types of ownership are joint tenancy and tenancy in common.
With joint tenancy, each buyer has an equal share in the property. This means you own 50% of the equity and your friend owns the other 50%. Should one owner die, their share of ownership would be passed to the other owner.
Tenancy in common
With tenancy in common, ownership can be split up any way you like. For example, you could own 80% of the property and your friend could own the remaining 20%. Should one owner die, their share of ownership can be left to an heir instead of automatically going to the other owner.
5. Divvy Up Household Responsibilities
Owning a home comes with a lot of responsibilities. One way to help avoid any potential miscommunication or conflict is to determine in advance who’s in charge of cleaning the home, watering the garden, mowing the lawn, shoveling snow, and so on.
6. Create a Plan for Paying the Bills
Will you each split all homeownership costs? If so, how will you pay those bills? You can expect to have both recurring expenses — monthly utility bills, property taxes, homeowners insurance — as well as surprise expenses, such as the need to repair or replace a broken appliance.
Common homeownership costs include:
- Property taxes.
- Homeowners insurance.
You may find it useful for both of you to contribute to a joint banking account to cover the cost of repairs and utilities.
7. Come Up With an Exit Plan
There may come a time when you or your friend want to move out of the home and sell your share of the property. Discuss with your friend how you want to handle such scenarios and put an exit plan in writing. Perhaps one of you intends to buy the other’s share in the future, or maybe you’ll agree to sell the house together and split the profit.
Even if neither of you is thinking about selling now, you never know what unexpected future circumstance might make either of you change your plans. If one of you loses your job or wishes to move in with a partner, making an exit plan in advance can help you transition out of the arrangement smoothly.
8. Put It in Writing
Once you’re in agreement about your arrangement, you and your friend should spell out the terms of your arrangement on paper. The more detailed you can be, the less likely it will be that you’ll have to deal with a messy dispute in the future. Be sure to cover how ownership costs will be managed and who is permitted to live in the home.
Do we need a legal contract?
While it may seem like overkill to have an attorney get involved to draft up a legal agreement — especially if you’re working with a close friend — it’s ultimately a good idea. You’ll be protecting both your friendship and your bank accounts by having an official contract in place.
9. Start House Shopping
This is the fun part where you get to browse home listings and tour properties. You and your friend will first need to be on the same page about location, your price range, and the size of the home. You also will likely need to get mortgage preapproval to show sellers and real estate agents that you’re serious about buying and you expect to get financing.
10. Get Approved for a Mortgage
Once you’ve successfully made an offer on a home, you need to officially apply for a mortgage. Your lender’s underwriting process will verify your income, assets, and debts to determine whether you’ll be able to afford the loan. Both you and your friend will need to provide financial documentation in the form of pay stubs, W-2s, and bank statements. If the lender determines that you and your friend can both comfortably take on the mortgage, then you’ll be approved.
11. Close On the Home
Closing day is when the deal become final, and you and your friend take official ownership of the home. You’ll both sign the necessary documentation and make your down payment. You’ll also need to pay your closing costs, which can add up. You and your friend should prepare to pay closing costs of about 2% to 5% of the purchase price.
Buying With a Group of Friends
It’s also possible to buy a home with more than one friend. If you’re thinking of buying a home with multiple friends, each person must meet your lender’s eligibility requirements for the group to get approved for a mortgage.
Here are answers to some frequently asked questions about buying a home with a friend.