Home prices have increased at a staggering rate in 2021, leaving many wondering whether or not they can afford to own a home on their own.
In the third quarter of 2021, home prices in the U.S. increased by 18.05%, according to the Federal Housing Finance Agency. As a result, many people, particularly those in younger generations, feel like they’ve been priced out of homeownership, a key part of the American dream.
If you want to become a homeowner but aren’t sure you can afford to do it on your own, co-ownership could be a solution. Here’s what to know about how it works, along with the benefits and drawbacks to consider.
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Why Co-Ownership Is On the Rise
The average age of homebuyers hit an all-time high in 2020 at 55, according to the National Association of Realtors. The increasing unaffordability of homeownership has left many prospective homeowners, especially younger ones, to look for alternative solutions.
“Millennials are a very creative generation,” says Erika Rasure, assistant professor of business and financial services at Maryville University. “But when you have so many of these financial barriers already, your options are limited as is your attainment of this American dream.”
Many people who feel priced out of owning a home have joined up with friends or family members to co-buy a home.
In the first quarter of 2018, 17.4% of all single-family homes were purchased by nonmarried co-buyers, according to ATTOM Data Solutions. In 2021, that number is estimated to be 25%, says CoBuy, a company that simplifies the process of co-buying a house.
But navigating co-ownership with someone you’re not married to can be a bit trickier.
How Does Co-Ownership Work?
Home co-ownership involves buying a house with one or more other people, such as a partner before marriage, relatives or close friends. All co-owners will be on the title and likely also the mortgage loan.
The group will need to decide how to hold the title. The two options include tenancy in common and joint tenancy:
— Tenancy in common. With this option, shares of the property aren’t divided equally between the owners. Rather, each person’s share of ownership is equal to how much money she invests in the property. That said, each person has equal rights to all areas of the property. Also, each owner chooses who receives her share of the property when she dies, so it won’t necessarily go to the other owners. If an owner wants to sell her share of the property, she must get consent from the other co-owners.
— Joint tenancy. When buying a property with friends or family with this option, each person shares equal ownership in the home, regardless of how much he invested. However, no one gets to choose his own beneficiaries in the event of death. Instead, the surviving owners automatically take over the deceased person’s share, again dividing it equally. Additionally, each owner can sell his share in the home to another person without the approval of the other co-owners.
“One of the biggest reasons to choose joint tenancy is if you want to avoid the property going through probate or to protect it from creditors (if an owner dies),” says Jesse Sheldon, director of operations and broker at Gordy Marks Real Estate.
As you consider both, consult with a real estate attorney to help you determine the best path for your group of co-owners. Also, note that co-owning a house with parents, other relatives or friends doesn’t mean that all co-owners must live in the home.
Regardless of which way you choose to hold the title to the home, each owner on the mortgage loan will be equally responsible for the debt.
[Read: Best Mortgage Refinance Lenders.]
What Type of Loan Do You Need?
When buying property with friends or family, you don’t need a specialized mortgage loan. Lenders are more concerned with your plans for the property — whether it will be a primary residence or an investment property — and your creditworthiness.
As a result, it’s important to take time to shop around and compare different loan programs to determine which is the best fit for you. Consult with a mortgage broker or a loan officer to get an idea of which options would best serve you and your needs.
Keep in mind, though, that there may be limits on how many people can be on a loan. For instance, Fannie Mae’s Desktop Underwriter, an automated underwriting system that lenders can use for conventional and government loans, only supports up to four borrowers. If you want more, you’ll need to undergo what’s called manual underwriting, which can be a complicated process.
Finally, while having a co-borrower with a higher credit score can make it easier to get approval, the interest rate on the loan will be determined by the lowest credit score on the application. So think carefully about who you want to buy a home with.
If you’re wondering how to buy a house with multiple owners, here are some examples:
Co-Owning a House With Your Friends
Let’s say that you and two friends all want to own a home, but no one can afford one on his or her own. As a solution, you decide to purchase a property together. Buying a house with a friend or multiple friends will typically result in all of you residing in the home together.
In this scenario, you decide on a joint tenancy title so that you all have equal ownership, and you decide to all be on the mortgage loan. You’ll each have equal ownership and equal responsibility for paying the mortgage.
If one friend passes away, that person’s share is split equally between the remaining owners. And if, at some point, you decide you want to sell your share in the home and move out, you can sell it to your co-owners or someone else. Either way, you can do so without permission.
“There are many benefits in a market like Seattle with a high barrier to entry of homeownership,” says Sheldon. “Getting together a group of friends who make an average salary will be able to get you a spacious home and tap into the great appreciation we are seeing.”
Co-Owning a House With Your Parents
In another example, let’s say you want to buy a home but don’t have enough money for a down payment, or your credit score isn’t good enough to qualify on your own. You may ask your parents to chip in on the down payment and be a co-borrower on the loan in return for a share of the property. However, only you will occupy the property.
In this case, you may choose tenancy in common, where your and your parents’ share of the home is equal to the percentage of the down payment you contribute. And while you’re both equally responsible for the mortgage loan, you may choose to make the full payments on your own.
Pros and Cons of Co-Owning a Home
Depending on your situation, there are both benefits and drawbacks to owning a home with a partner before marriage, friends or relatives. Here’s what to keep in mind before you decide to go down that path:
— Sharing a down payment and mortgage payments can make it more affordable to own a home.
— Getting help on a down payment and mortgage application from a parent can help you get into a home when you can’t do it on your own.
— You can start building equity in a home sooner than you would be able to on your own.
— If all owners are occupying the home, you could save even more by sharing utilities, maintenance, repairs and other expenses.
— All co-owners on the mortgage loan are equally responsible for paying the debt, even if one can’t pay his share.
— The loan’s interest rate will be determined by the borrower with the lowest credit score.
— Co-borrowers may run into issues if one wants to sell her share, even if she doesn’t require consent from the others.
— A death among the co-owners can create an issue if it’s a tenancy in common arrangement and the deceased chose an outside beneficiary.
Tips for Buying a Home With Multiple Owners
If you’re thinking about buying a home with friends, relatives or anyone else, it’s important to think carefully about the process to ensure that it’s a good experience for everyone involved.
For starters, only consider this type of arrangement with someone you trust implicitly. You’ll also want to talk about credit scores and finances early on in the process. Because it may be risky to leave one co-owner off the mortgage loan — leaving them without equal financial responsibility for the debt — some may need to work on improving that person’s credit before starting the process.
Also, it’s a good idea to hire a real estate attorney to help you determine the following:
— The type of title.
— How shares will be divided.
— How ongoing financial responsibilities will be split.
— What happens if one owner can’t meet his portion of those responsibilities.
— How shares will be passed upon the death of a co-owner.
— What will happen if an owner wants to leave the arrangement.
“There’s always that risk that there could be a falling out, or there could be a change in financial position, or what happens if the market tanks,” says Rasure. “I think the biggest risk is poor planning and not thinking through those human and life experiences that could really throw us off. The biggest risk is not having important and critical conversations and drafting agreements that really specifically state in the event that this or that happens, this is our plan.”
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