Have you ever considered buying a home with friends? With the Toronto real estate market soaring, and the continued challenges first-time-buyers face to actually purchase a single-family home, many are turning to this unconventional option. Could you do it? Should you do it? There are pros and cons to each side, but before you pass this up, be sure to weigh your options fairly and honestly.
Before outlining the pros and cons, you should really look at your close friends to see if this could even be an option to discuss. Do you have friends who are in a similar financial situation? Are they ready to move to a new phase of their life? Perhaps you and your significant other have close friends who have a similar life plan. Perhaps you’ve got a best friend who is also sick of living in their small condo and are looking for more. There could be plenty of great options for you to consider.
How to Buy a Home with Friends
There are a number of boxes to check before signing on the dotted line and buying a home with friends. Here are our best tips to ensure a fair arrangement:
- Get everything in writing, that both parties agree upon in a separate legal binding contract.
- Split the house evenly. Try to have your own distinct areas. If you have two couples living together in the same house, try to dedicate space to each, similar to living in a semi-detached home, or a basement apartment.
- Determine the percentage split of the home based on square-footage, access to garage or yard, brighter space in one part, etc.
- Layout all cost splits – the best way to do this is 50%/50%.
- Suggest a three-year “lock period” during which neither person or couple can sell. Once that expires, either person or couple can say they want to move on to the next thing and the other couple has the ability to buy them out at market price before other offers are considered.
- Create two bank accounts – one for the mortgage payment based on the split and one for expenses.
- Set a time each month to review expenses and costs so there is no miscommunication among either party.
Now that you know it’s possible and not utterly complicated, let’s weigh the benefits and disadvantages of buying a home with friends.
Benefits of Buying with Friends
Easier Home Loan Qualification
Anyone who has purchased a home in recent years knows the challenge of getting a mortgage loan. Lenders have tightened their standards with regards to credit scores, existing debt, and down payments. Many have discovered that it’s exceedingly difficult to qualify for a mortgage on their own. But with two people signing the mortgage application, the odds of approval increase.
If you decide to proceed, the mortgage lender will base approval on your combined income and the average of both credit scores. This increases your financing opportunities, and with two people splitting the down payments and closing costs, you spend less money out-of-pocket. This also increases if it’s two couples purchasing a home together.
Shared Monthly Expenses
As a property owner, it’s your responsibility to pay for utilities, maintenance, and repairs – in addition to the mortgage payment. The extra expenses that come with home ownership scare some people. However, friends who purchase together share these expenses, essentially halving the financial burden. Plus, sharing expenses improves your personal finances by giving you the opportunity to build your savings account or pay down debt.
Home Equity Gains
The longer you and your friend live together and make mortgage payments, the more equity you gain. Equity is the difference between your home’s value and what you owe the lender. Realistically speaking, you and your friend or friends will one day go your separate ways, and unlike renting, home ownership lets you walk away with cash in your pocket. You can split proceeds from the sale and put the money toward a down payment on your own places.
Disadvantages of Buying with Friends
In a perfect world, you and the other owner or owners will always get along – but, of course, disagreements are bound to occur. Problems can arise between roommates, and unfortunately, some joint owners are unable to work out their differences. When you rent an apartment with a roommate, it’s easier to walk away. However, it’s not so simple when you own a house.
Both of your names appear on the mortgage, and therefore, you’re both responsible for the home loan. If the other owner becomes upset or decides to leave, he or she can’t just pack up and move out. To break all ties, you have to either sell the house, or refinance in one owner’s name. Neither option is simple – it can take several months to sell a house, and if you can’t qualify for the mortgage on your own, a lender will not refinance, and the other owner’s name will be stuck on the mortgage.
Potential Credit Score Damage
You might be responsible and pay your half of the mortgage payment and utilities each month. Unfortunately, your roommate might not be. Your friend or friends may initially pay on time, and likely has the best of intentions. But a job loss or other major bills can strike anyone at any time. And if your roommate is unprepared and can’t pay his or her share of the mortgage, it could affect your credit rating. Since both names are on the mortgage, you’re both responsible for payment, and the bank will report you as well as your roommate to credit agencies for non-payment or in the case of foreclosure.
Difficulty Qualifying for Other Loans
A big loan on your credit report may limit your availability to qualify for other loans, such as an auto loan. In seeing whether you qualify, the lending institution will look at the amount of debt you’re responsible to pay monthly relative to your income. Since you’re responsible for the entire mortgage payment (your friend is also), your debt to income ratio may increase such that you can’t qualify. Spouses often deal with this issue by both applying for other loans together. However, you may not want your roommate on your auto or any other loan (and he or she may not want that either).
Buying a home with friends is a big decision to make but think of this as a short-term option to getting into the Toronto housing market, and make a solid profit while having a bit of fun in the process.