When two or more people decide to buy a house together, they take both financial and legal risks. Co-owners also risk damage to the relationships they share with one another. However, co-owning a home can also substantially benefit each party involved. From low credit scores to lots of student loan debt, co-ownership helps would-be buyers overcome barriers in today’s incredibly competitive housing market. Through co-ownership, homeowners who would otherwise struggle to enter the market establish a foothold. They are able to stop paying rent to a landlord and start building equity of their own. In this post, we consider the many pros and cons of co-owning a house. We also explain how co-owners can protect themselves – and their friends or family – from legal and financial risk. Follow below to learn everything you need to know about co-owning a house with a friend, partner or sibling.
A Brief Introduction to Co-Owning Property
When two or more parties own the title to a property, they “co-own” that property. A co-owned property could either be an investment property — like a rental property — or a primary residence. Some — like duplexes — are a mixture of both. Co-ownership is usually established through joint tenancy or tenancy in common – both of which determine the share of a property each party owns. In these situations, co buyers may apply for a mortgage together – called a “joint mortgage” – and pool resources to fund the down payment.
Throughout the life of their home loan, each co owner typically makes mortgage payments. They also cover the cost of repairs and contribute to the annual property tax bill. Joint tenants and tenants in common will usually sign a cohabitation or co ownership agreement that outlines the financial responsibilities of each party. In our post “Should I Sign a Cohabitation Agreement When Buying a House?,” we recommend co-owners consult a real estate attorney before signing. Co-owners can be family members, friends, common law spouses or even business partners.
Over the last few years – particularly during the COVID-19 pandemic – co-owning property has become more popular amongst young buyers. It is especially popular amongst buyers who have otherwise struggled to enter the housing market. According to Ben Luthi in an article for US News, “the average age of homebuyers hit an all-time high in 2020 at 55.” Luthi notes that “the increasing unaffordability of homeownership has left many prospective homeowners, especially younger ones, to look for alternative solutions.” With less borrowing power due to student loan debt and stagnant wages, it has been incredibly difficult for younger generations to join the market.
When Co-Ownership Just Makes Sense
According to Nicholas Vega in a recent article for CNBC, the typical Millennial owes “an average of $87,448.” Referencing data from Experian, Vega writes that the average Millennial holds $4,322 in credit card debt. They also hold $38,877 in student loan debt, $19,011 in auto loan debt and $12,306 in personal loan debt. Their credit scores – which lenders routinely check before proceeding with a mortgage application – tend to work against Millennials as well. Their scores are rising more rapidly than those of other generations. However, Millennials still have much lower credit scores on average than Gen X-ers and Boomers. In 2020, the average Millennial had a credit score between 658 and 680 points.
Writing for The Balance, Rachel Morgan Cautero notes that “Millennials have 300% more student loan debt than their parents did.” At the time of publication in June 2021, Millennials were “half as likely to own a home than a young adult was in 1975.” Referencing research conducted by the Pew Research Center, Cuatero writes that there are currently “more Millennial households in poverty than any other generation.” All of this paints a bleak picture for Millennials seeking homeownership in the United States. Buying a house with friends, siblings – or even parents – is the only option for many Millennials. Thankfully, it is often a good option. From investment properties like duplexes and fourplexes to primary residences, co-ownership has allowed Millennials to finally escape renting and begin building equity.
Pros and Cons of Co-Owning a Home
Benefits of Co-Ownership
#1 It Could Be Easier to Qualify for a Mortgage Loan
During the 2007 – 2008 financial crisis, the federal government tightened the rules around mortgage lending. To limit predatory lending, the federal government now requires banks and other lenders to better understand a borrower’s financial picture before granting home loans. Because many lenders now require higher credit scores and more favorable debt-to-income ratios, certain would-be buyers have struggled to obtain financing. Applying for financing with a friend or family member could mean better loan terms.
In her article “Buying A House With A Friend: A Guide To Legal And Practical Considerations” for RocketMortgage, Katie Zeraldo explains. Zeraldo writes that “by combining your income (and debts) with your friend, you have a better chance of being approved for a mortgage.” You also have a better chance of getting “a lower interest rate.” Of course, there is also the possibility that co-applicants with lower credit scores could raise the mortgage interest rate.
#2 You Could Make Passive Income With a Shared Investment Property
If you purchase a duplex or other multifamily property, you and your co-owners could look forward to a pretty permanent cash flow. To limit liability, co-owners often put their shared rental property in an LLC. In her article “Should You Form an LLC for Your Rental Property?” for NOLO, attorney Christine Mathias explains. Mathias writes that putting your rental property in an LLC protects your home and other assets “from the debts of the business.”
Rental properties held in LLCs also qualify for the pass-through deduction. According to Matthias, this “means that the LLC does not pay corporate tax (as corporations do).” Keep in mind that some communities do not allow ADUs, duplexes or single family homes to be used as short-term rentals. Check with your local government before purchasing an investment property.
#3 You Could Avoid Paying Private Mortgage Insurance
By purchasing a house with a friend or family member, you will probably end up with more cash for the down payment. In certain situations, this could mean you and your co-owners avoid paying private mortgage insurance all together! For example, if one owner can afford to put 5% down, but another owner can afford 15%, both co-owners could avoid PMI. Most mortgage lenders require borrowers to pay for private mortgage insurance if they cannot afford a 20% down payment. Applying jointly might mean a bigger down payment and a lower monthly mortgage payment for all involved!
#4 You Can Split the Costs Associated with Homeownership
Of course, monthly mortgage payments are not the only costs associated with homeownership. Homeowners must also pay property taxes and insurance policy premiums. They must conduct routine maintenance and cover the costs of improvements and repairs. If in a gated community, homeowners might also owe HOA membership fees. When co-owning a house, these financial and operational responsibilities are shared. By sharing financial and operational responsibilities, each co-owner has less to do and less to pay.
Keep in mind that you and your co-owners will not be able to claim the full amount for each tax deduction associated with homeownership. From the mortgage interest tax deduction to the property tax deduction, learn all about the many tax breaks offered to homeowners in this post.
#5 You Can Stop Renting and Start Building Equity
According to Liz Knueven in February 2022 for Business Insider, “the median monthly cost of homeownership in the US is $1,609.” In an article for Apartment List, Chris Salviati et al. note that the median cost of rent is only $1,312 per month. However, the average American single family home has three bedrooms and 2,400 square feet. The average apartment is under 1,000 square feet. While homeowners might pay more than renters, they are not paying solely into another person’s pocket.
Of course, most early mortgage payments go towards paying off interest rather than paying down the premium. Unlike renting, homeowners gain some amount of equity – no matter how small – each time they make a monthly mortgage payment. As homeowners build more equity in their homes, they can choose to leverage this equity. For some prospective homeowners, co-owning is the only way to build equity.
Disadvantages of Joint Ownership
#1 Your Mortgage Lender Might Limit the Number of Co-Applicants
Many co-ownership examples include only two or three co-owners. However, some homes – particularly rental or other investment properties – are owned by a bigger group. Unfortunately, lenders often limit the number of co-applicants when considering joint mortgages. In his article “What You Should Know About Co-Owning a House” for US News, Ben Luthi explains. For example, Luthi writes that “Fannie Mae’s Desktop Underwriter…only supports up to four borrowers.”
Groups of more than four applicants must “undergo what’s called manual underwriting, which can be a complicated process.” According to T.J. Porter in “How many names can be on a mortgage?” for Bankrate, certain lenders do not offer manual underwriting. Quoting Quicken Loans VP of Capital Markets Bill Banfield, Porter notes that these lenders might make an “exception to that rule [for] VA loans.”
#2 Your Neighborhood Might Restrict How the Property Can Be Used
In her article “Legal and Financial Issues to Consider When Co-Owning a Home” for NOLO, Janelle Orsi notes that not all communities embrace co-ownership. Orsi writes that “each city or county has a planning agency that enacts zoning ordinances controlling how particular neighborhoods are used.” Residential communities that are zoned single-family only “can conflict with shared housing in several ways.”
For example, these communities might place “restrictions on how many people can live in a home and how many unrelated people can live together.” They might also restrict the number of dwelling units on each lot and outline “extra requirements for multi unit housing.” To make sure you can legally use your co-owned property as you wish, “look at your city’s general plan.” You should also “ask someone at the planning agency, or check your city’s website.”
#3 You Might Struggle to Sell if You Need to Move in the Future
Above, we mentioned a couple different ways co-owners can legally allocate shares. The most common types of joint ownership are tenancy in common and joint tenancy. In a joint tenancy, each co-owner has an equal interest in their property. If a co-owner dies, their share is inherited by the surviving owner. With tenancy in common, shares can be unequal. This means that one co-owner might have a 30% share while the other has a 70% share. Ownership handled in this manner is typically split based on the financial contributions of each partner.
For instance, the co-owner with a 30% share might pay only 30% of the mortgage payments owed each month. Tenants in common do not inherit shares when a co-owner passes away. Instead, these shares are inherited by willed successors. Tenants in common cannot legally sell the entire property or their personal shares without the agreement of all other owners. Joint tenants can sell their shares whenever they wish without co-owner consent. Depending on your co ownership agreement, it could be very difficult to sell your share of the property. If you need to move for a job or other life change, you might spend months fighting your co-owners.
#4 You Could Be Responsible for Paying the Entire Mortgage if Your Co-Owner Defaults
Perhaps the greatest risk involved in co-owning property is co-owner default. If you and your co-owners apply for a joint mortgage and one fails to make payments, you could be forced to cover the balance. In his article “Legal Pitfalls of Buying a House With a Friend” for SF Gate, Tony Guerra explains. Guerra writes that “if your friend later refuses to pay on the mortgage loan you both owe, you’ll still have to make the payments.” When you and your co-owner applied for the loan, you probably determined how much each could afford every month.
If your friend defaults, paying double what you expected might be impossible. Unfortunately, “if you’re unable to afford the mortgage loan payments that your friend isn’t helping to pay, your home could be foreclosed.” Not only will this cost you your home. It will also majorly damage your credit and ability to buy another house in the future. There is also the possibility that your co-owner could fall ill or pass away — making the remainder of the mortgage your financial responsibility. Thankfully, there are ways to protect yourself if this should happen.
Protecting Yourself with a Credit Life Insurance Policy
In “Buying a House With a Friend as an Investment” for Investopedia, Jean Folger explains how homeowners can protect themselves. Folger recommends that “each partner purchase life insurance on the other to pay off the mortgage in case of death.” The most popular type of life insurance for this purpose is called “credit life insurance.” Writing for NerdWallet in her article “What Is Credit Life Insurance, and Do You Need It?”,” Georgia Rose explains.
Rose writes that “credit life insurance pays off your loan if you die before settling the debt.” If you or your co-owner passes away unexpectedly, your credit life insurance provider pays the lender directly. Some mortgage brokers sell this type of policy, calling it “mortgage life insurance.” Paying into your policy each month ensures your co-owner is protected from financial ruin should you pass away.
Final Thoughts on Co-Owning a Home
In the final section of this post, we offer our advice for co-buying a house with a family member, friend or business partner. Before meeting with a mortgage lender or real estate agent, consider the following to make your co-ownership experience as smooth as possible:
- Decide between tenancy in common and joint tenancy
- Establish how much of the property each tenant will own
- Consider fractional mortgages instead of a joint mortgage
- Draft a co ownership agreement in the presence of a real estate attorney
- Check your co-owner’s credit score and DTI ratio
- Make sure your goals align with your co-owner’s goals
- Determine who will pay for what and when
- Be honest about what you can afford each month