Trick or Treat? How to Make Buying a House with a Friend Less Scary

As Halloween quickly approaches and we all prepare for the little ghosts and goblins that will be knocking on our doors in search of spooky holiday treats, we’re taking a minute to examine the tricky situations that can sometimes arise when buyers decide to make a big home purchase with a friend. Dun Dun Duunnn!

In theory, it doesn’t sound so scary, right? Obviously, buying a house with a friend is a money-saving venture and it seems like an ingenious way to allow those carefree college days to continue!

But, remember, just like the faces behind all of those creative costumes that will be knocking on your door this Halloween, buying a house with a friend may be masked as a money-saving solution, but it can have terrifying downsides if not handled properly.

First, let’s take a look at all the treats that come with buying a house with a friend:

1. Financial Treats – When two people apply for a mortgage, they are combining their income and savings, so their chances for mortgage approval increase. Because they are going into the venture together, each party pays less out of pocket for a down payment and monthly expenses and they likely will be able to afford a bigger home if they so choose. When buying a house with a friend, both buyers will build equity and they will be able to split the annual mortgage interest deduction.

2. Friendship Treats – Whether it is a college buddy or lifelong pal, for whatever reason many people would consider moving in with a friend to be easier and less stressful than living with a family member.  

Now, for the tricky parts about buying a house with a friend:

1. Financial Tricks: When buying a house with a friend and a disagreement arises, which is bound to happen in ANY living situation, it is very difficult to walk away from the joint purchase. Another tricky part about sharing a mortgage with a friend is what can happen if one party is unable to pay their portion of the mortgage on time. Ultimately, both parties’ credit scores can suffer. Finally, when both buyers are named on a mortgage, they both are technically responsible for the entire amount of the mortgage; thus, their debt-to-income ratio is lowered, meaning it may be harder to apply for other loans.

2. Friendship Tricks: All of the financial “tricks” above are certain to put a strain on any friendship, but there are many other factors about living with a friend that can be very tricky, too. Friends may have lot in common, but their definitions of “clean” may differ; they may have different feelings on guests or parties; and, they may even feel different about home repairs or upgrades. All of these tricky factors could be taxing on a friendship.

So, what can you do to make sure that buying a house with a friend is a treat and not such a tricky situation? Here are a few tips:

1. Make sure your friend passes the truth test. You never want your friends to be dishonest with you and that is paramount when it comes to buying a home together. Before you plan to enter a mortgage agreement with a friend, carefully examine all of your past experiences together to make sure your friend is as responsible, honest and true as you are!

2. Make sure you know everything about your friend. Two friends may think they know all there is to know about each other, but when they plan to buy a house together, they may learn a whole lot more. It is important for both parties to know each other’s credit score, income and other assets, like savings accounts and retirement funds.

3. Ensure the deal with insurance. When two friends decide to buy a home together, it is a good idea for them to take out a term life insurance policy on each other. That way, in the unfortunate even that one owner passes away, the other owner is not burdened with the entire mortgage.

4. Hire a lawyer to take care of the fine print. Buying a home with a friend is no reason to skimp on the details. No one wants to think of the worst-case scenarios, but a lawyer will. Have them draw up a contract (check into tenants-in-common and joint tenancy agreements) to account for things like the down payment, tax deduction, repairs, noise, pets and any other policies you feel are important.

5. Consider the end. Because life happens, many friend-bought homes do not last more than a few years. So, it is important to consider what happens to the home when one party decides to get married, move away or go in another direction. 

Above all, buying a home is an investment. It may be difficult to think of buying a home with a friend as a business transaction, but if it is treated that way, it is likely to be much less tricky! Happy house haunting… er hunting!

This post is sponsored by PA Preferred Mortgage:

Pennsylvania Preferred Mortgage is a full service mortgage banker and is a member of the Prosperity Home Mortgage, LLC family. Specializing in residential and refinance loans, Pennsylvania Preferred Mortgage offers a wide range of mortgage products, including fixed and adjustable rate mortgages, jumbo loans, Federal Housing Administration (FHA) and Veterans Affairs (VA) loans, and renovation financing. Learn more at www.papreferredmortgage.com.