If you want to save some money on your housing costs and have a few buddies who you like living with, consider buying a home together.
Not only can you spend less each month for your mortgage bill, you also get to split the closing costs, down payment and other home buying expenses. Additionally, each person can have his or her own room with all the amenities of a detached home, and the combined income can help the group get a nicer property than you all would have been able to afford individually.
While these advantages are enticing, you have to plan carefully when deciding to purchase a home with friends. This is a business partnership that has legal implications, so you need to make sure that you're ready to commit to some years in the home with your pals.
Get to know your friends
Similar to how home inspection services reveal hidden details about a property you're considering, you need to solicit information from your friends. Take some time to speak with your prospective roommates about their finances. Each person must be candid about factors such as your credit scores, income, savings and other factors. Doing so gives everyone a clear idea of how each roommate is supplying his or her contribution to the bills each month.
Apply for a mortgage
When filling out a home loan application with more than one borrower, lenders focus their attention on the individual with the lowest credit score, which further indicates why it is necessary to have full disclosure when discussing finances. You have options when deciding who will be listed on the loan: The roommates with the best credit can be the only borrowers, or all roommates can be listed on the mortgage.The former improves your chances of approval, while the latter is a great way to ensure that everyone has a equal stake in the repayment of the mortgage.
Draft a tenants-in-common agreement
People often have the best intentions when making a joint purchase, but their actions may not reflect any promises made before the mortgage documents were signed. To ensure that each occupant is meeting his or her financial obligations, have a lawyer create a tenants-in-common agreement detailing how the bills will be paid each month, who is responsible for repair costs and so forth.
Here are some things that should be in TIC agreement:
- Rules about daily living, such as noise, pets and parties
- Who will contribute to the down payment and what amount
- Who will pay the mortgage, property tax and other expenses each month and how much
- Who will receive the tax deduction and how will the other co-owners get a share
A TIC agreement can also be useful for ensuring that no single roommate can use the property as collateral without the consent of the household.
Think about the future
While you can enjoy more affordable housing costs and good times with your friends when you share a house, you have to consider a plan for when one roommate is ready to move out. From job relocations to marriages, there are many reasons why someone could need a new living arrangement. You also have to plan for the possibility of negative occurrences, such as job loss.
Your plan should be laid out in your TIC agreement. In most cases, roommates are allowed to sell their interest in the property without the consent of the rest of the household. Putting legal guidelines in place can help with ensuring that no one is financially or otherwise blindsided.