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When you co-own a house with one or more people—typically your partner, a close friend or a relative—all borrowers are listed on the title. In most cases, each co-buyer is also listed on the mortgage and responsible for the repayment of the loan. While co-owning a home has benefits, there are several things to consider first. Find out how co-owning a house works, the pros and cons, and useful tips so you're "at home" with your decision.
How Does Co-Owning a House Work?
In December 2022, the average 30-year fixed mortgage rate was about 6.3%, according to Freddie Mac's Primary Mortgage Market Survey. Add in rising home prices and an increase in living costs, and it's easy to understand why potential homebuyers may turn to co-ownership as their best option for owning a home. Having another borrower to help come up with the down payment, closing costs and monthly mortgage payments means potential buyers are more able to make homeownership a reality by co-owning.
But there are a few legalities regarding the title to the home that you must work out first. Two main types of co-ownership may come into play.
- Joint tenancy: With joint tenancy, each person shares equal ownership in the home, even if each person invested different amounts. If one co-owner decides to sell their share in the home to another person, they do not need the approval of the other co-owners. Also, if one co-owner passes away, the surviving owners take over the deceased person's share of the property.
- Tenancy in common: With tenancy in common, each person's share of ownership is determined by how much they invest in the property. So, if one person invests 80% of the cost of the home while the other co-owner only invests 20%, then the person who invested more has greater ownership in the property. Each person—no matter the amount invested—has the legal right to occupy and use all areas of the property. However, if one owner wants to sell, they must get consent from their co-owners. When sold, the proceeds from the sale are typically divided based on the original investment percentages.
Not all co-buying arrangements call for each person to live on the property, however. A non-occupant co-borrower may be listed on the mortgage to help out a child or relative. Some parents may see it as investing in their child's future with no intent of living on the premises. They are still listed on the home's deed and are expected to make regular mortgage payments even though they do not live in the home.
Each type of co-ownership has specific rights and duties, and each must meet certain requirements that can vary from one state to the next. If you're unsure about how to hold the title to the home, you may want to get the advice of a real estate attorney in your area.
Applying for a Mortgage With a Co-Owner
When one or more people apply for a mortgage loan, they are typically listed as co-borrowers and become jointly liable for the mortgage payments. If one owner can't or doesn't pay, the other will have to pick up the slack to avoid defaulting on the loan.
Generally, when you apply for a mortgage loan, your lender will look at both of your incomes, assets, debt-to-income ratios and credit scores to determine your eligibility. Having two incomes often makes it easier to qualify for higher loan amounts and possibly better terms. Also, a co-borrower with strong credit and stable income can help you get into a home if your credit needs work, you need help with the payments or you lack the income to qualify for a mortgage loan on your own.
Keep in mind that the interest rate you receive on your loan will generally be determined by the lowest credit score on the application. As a result, giving your credit score a boost and comparing different lenders' terms can help determine which loan option is the best fit. Before you decide if co-ownership is right for you, consider all of the benefits and drawbacks.
Pros and Cons of Co-Owning a Home
While co-owning a home can open the door to homeownership, it comes with both pros and cons.
- Lets you jump into homeownership: With a median home price in the third quarter of 2022 of $454,900, according to the Federal Reserve Bank of St. Louis, you may only be financially able to purchase a home when sharing the financial responsibility with others.
- Helps lower your expenses: In addition to a down payment, closing costs and other fees incurred when applying for a mortgage and buying a home, ongoing expenses can include upkeep on your home, property taxes, homeowners insurance and utilities.
- Builds equity: Paying rent on time each month can help boost your credit score as well as your co-borrower's score, but it won't build equity like homeownership can. Almost any other type of asset purchased with a loan, like your car, loses value over time. However, a home typically builds equity (that you can use) and often grows in value over time.
- Easier to qualify: Although lenders usually look at the lowest credit score when determining the interest rate on your loan, lenders consider both incomes instead of just one when deciding to lend to co-borrowers. That means you may qualify for the loan more easily and you may even be eligible for a higher loan limit than if you applied alone.
- Shared liability for the debt: Both co-owners are typically liable for the debt. That means that if one buyer misses payments, the burden for making the payment falls on the other person. Missed payments can also potentially hurt your credit. On the other hand, on-time payments can help improve your credit score.
- Possible dip in your credit score: When you apply for a loan with a co-buyer, your lender will likely do a hard inquiry. This will cause a slight dip in your credit score temporarily.
- Eligibility is based on the lower middle score: Lenders look at the credit scores of both applicants to qualify you for a loan. They typically consider the "lower middle score" of each applicant. For instance, if your credit scores from the three credit bureaus (Experian, TransUnion and Equifax) are 750, 718 and 689, and your co-borrower's scores are 700, 667 and 649, lenders will use the lower of the two middle scores, or 667, when deciding whether to loan to you and setting your interest rate.
- Possible risk to your relationship: If either co-owner fails to make payments or live up to their legal responsibility, you risk damaging your relationship. Even smaller conflicts, such as who will pay for repairs and maintenance or whether you'll own pets, can strain your relationship.
Tips for Buying a Home With Multiple Owners
Buying a home with a co-owner can be both complicated and beneficial for someone who never thought they could own a home, either now or in the foreseeable future. Before changing addresses, however, check out these tips for buying a home with multiple owners.
Buy a House You Can Afford
One way to avoid problems when entering into a co-buying arrangement is to make sure you can cover the monthly mortgage payments, your down payment, closing costs and all other expenses related to owning a home. Consider all incomes and monthly debts, like student loans and car payments. Also make sure you have an emergency fund for unexpected expenses, like if you find out you have termites or if one owner can't make their monthly payment.
Decide How You'll Split Expenses
Keeping up with all the expenses that come with homeownership is often overlooked when purchasing a home. Besides property taxes and homeowners insurance, things like replacing a roof, fixing leaky pipes, buying a new heating or air conditioning system, or dealing with mold or faulty electrical wiring can add up quickly.
If one owner holds a larger percentage of ownership in the property or earns a higher salary, they may pay a higher percentage of the monthly bills. Deciding beforehand how these expenses will be split is important to avert any potential arguments down the road.
Devise a Plan if One Owner Wants to Sell
Before you enter into a binding agreement with another co-owner, it's a good idea to devise a plan—in writing—for a situation where your co-owner wants to sell and you don't. If your agreement is a tenancy in common, they must get consent from all co-owners before selling. However, if you have a joint tenancy, they do not need the approval of the other co-owners. Signing an agreement before you purchase the home together can also help you form a plan ahead of time. Maybe you want to buy out their part of the house or add another co-owner to the title. In this situation, things can get sticky quickly, so it's always best to seek out the help of a real estate lawyer.
Plan for Financial Emergencies
An issue that can crop up when co-buying a home is if one homeowner's financial situation suddenly changes. It could be because of job loss, an unforeseen emergency or simply that one buyer can't or won't pay their share of the mortgage payment. You may be responsible for only a portion of the monthly mortgage payment, but if you can't pick up the slack, your credit score could take a hit and you may even lose your house to foreclosure. Working out the details and having a serious talk beforehand—like if you'll be reimbursed or obtain a higher percentage of ownership in exchange—is vital.
The Bottom Line
As the median income needed to buy a home has risen to $88,300 in 2022, up nearly $40,000 from 2019, according to the National Association of Realtors, it's no surprise people are finding creative ways to purchase a home. Co-owning can help willing buyers get into a house they may not be able to afford on their own. But there are details to work out and risks to understand before moving forward.
Equally important is knowing where your credit stands before you apply for a mortgage.