Many people aspire to become homeowners one day, but the current economic climate and their personal opportunities and finances play a big part in how soon that plan can come to fruition.
One option that is worth considering is co-ownership of a home with friends or non-spousal family. This enables an individual to boost their credit history and potentially move from renting or leasing to a mortgage arrangement; however, home co-ownership comes with its own set of benefits and disadvantages.
As with any other financial move, be sure to evaluate the risks and possible rewards before deciding that co-ownership, especially with friends or relatives, is right for you.
What Co-Owning A House Means
Co-owning a house means that an individual agrees to legally take on the burden of a mortgage with another person instead of solely taking out the home loan in their own name.
It is different than simply living with someone and agreeing to make your own share of the mortgage payments; instead, co-ownership is legally binding, and you and all other parties who agree to the arrangement will appear on the home’s mortgage.
This means that everyone is equally responsible for ensuring that the mortgage is paid on time. The concept of taking out and sharing a mortgage with friends or family certainly has benefits, but it comes with drawbacks as well.
The Benefits Of Choosing Co-Ownership
One of the most notable benefits of choosing co-ownership instead of a mortgage that is solely in your name is the ability to share the financial burden of the loan.
Multiple people paying a share of the bill will reduce individual costs for everyone, and the same is also true for commitments like utilities and even home repairs, which can be costly when you are managing a home on your own.
Co-owners are also eligible to continue to claim mortgage interest tax credits, but this amount should be split with the other co-buyers.
Additionally, applying for a mortgage together makes qualification easier to begin with.
Your debt to income ratio alone may not qualify you for a loan, or it may impact how favorable your terms are.
By adding more income through the addition of another borrower, you can improve your odds of both qualification and a good deal on your mortgage rate.
The Risks Of Co-Owning A House With Friends Or Relatives
Co-owning a house can be the right choice for some, but it comes with a number of important risks to keep in mind. Joint ownership only works smoothly if all parties are responsible and make the payments they have agreed to.
If one or more members of a co-ownership situation fails to pay their share or are late on payments, everyone on the mortgage will suffer as a result. This can lead to credit score impact through delinquency and even cause the home to end up in foreclosure.
Another challenge in the co-ownership equation is the ability to leave. Walking away from a mortgage when you are just one of a number of borrowers is more challenging than it would be if you were responsible for the mortgage alone.
One person may be able to buy out the other, but that requires significant investment, and a refinance on the loan may leave the remaining individual(s) struggling to qualify on their own.
Loans And Agreements To Make Co-Ownership A Success
In general, mortgages will be approved in the same manner regardless of whether you are applying on your own or jointly. The lender will evaluate your income history, debt to income ratio, credit and other factors to evaluate whether you qualify.
With more people, this process is typically easier.
However, many co-owners elect to improve their chances of success by also working with an attorney briefly to draft an ownership agreement.
This document outlines the expected responsibilities and commitments of each party, as well as outlining what to do if one or more individuals would like to leave the agreement early.
These contracts are also a valuable means of delineating who owns how much, should people not share a 50/50 split of the home’s value.
Work with The Home Buying Experts
If you are considering co-owning a home with friends or relatives, the situation can be more complex than sharing ownership with a spouse. Be sure to work with home buying experts who can help you to navigate the process and start the journey of co-ownership on the right foot.
Fairfax Mortgage Investments would be happy to offer guidance as you consider joint ownership; reach out to schedule an appointment with our team today.