Buying a house with a friend (or two) is one way to combat rising prices. Here's what to consider before trying this homebuying strategy.
With the price of housing increasing all over the U.S., many people are looking for creative ways to become homeowners. From house hacking to slow flipping and to getting down payment assistance, there are plenty of ways for people to make owning a home a reality.
One way that you may or may not have thought of becoming a homeowner is by buying a house with a friend. Yes, just like you’d purchase a home with your significant other, you can purchase a home with your pals.
But should you buy a house with a friend? Only you can say for sure, but we’ve done a deep dive here on everything you need to know before making that commitment.
What's in this Article?
In short, yes, you can buy a house with a friend. Conventional loans backed by the government-sponsored enterprises (GSE) Freddie Mac and Fannie Mae allow up to four co-borrowers. These limits apply to loans that go through automated underwriting. However, Freddie and Fannie do not limit the number of borrowers for manually underwritten loans.
Co-borrowers do not have to be related in any way for any loan type.
Government loan programs – including VA, USDA, and FHA loans – technically have no limits on the number of co-borrowers. But lenders can impose their own lending limitations and criteria. As a result, some may not allow as many borrowers on a mortgage.
|Loan type||Number of co-borrowers allowed|
|Conventional||4-5 for automated underwritten loans; no limit for manually underwritten loans. (Lenders may impose their own limits)|
|FHA||No limit, but lenders may impose their own|
|VA||No limit, but lenders may impose their own|
|USDA||5 for automated underwritten loans; no limit for manually underwritten loans. (Lenders may impose their own limits)|
If you buy a home with a friend – or any co-borrower, for that matter – everyone who will be on the loan must go through the mortgage approval process. This means they will have to submit to a credit check and provide information about their income, assets, and debts.
It’s smart to get pre approved before you start looking at houses so you know whether you and your co-borrowers all qualify. If one of you doesn’t, you may want to rethink the shared purchase or have a bigger discussion about your finances and what you need to do to be eligible.
Should you buy a house with a friend?
Just because you can buy a home with a friend doesn’t always mean you should. Whether this is a good move depends on a variety of factors.
There are many reasons you’d want to purchase a home with a friend instead of buying a house on your own. Two incomes may mean you’ll be able to buy a larger house, and you can share the costs of home maintenance, repairs, lawn care, and general upkeep.
But buying a house together can spell doom for your friendship if you’re not on the same page about your finances, your intentions, and how you’ll handle potential conflicts.
“This always seems great at the time you are buying. But in my [experience], it ends up very ugly, with fights, buyouts, and the ending of friendships,” says Michael Graber, a branch manager with Fairway Independent Mortgage Corporation in Montvale, N.J. (Fairway owns Home.com). “The best way to set yourself up for success is to put everything in writing with consequences for violating the agreement. Make sure you err on the side of spelling out too much rather than not enough.
There are two common scenarios in which buying a house with a friend might make sense. Here’s what to consider in each.
In this scenario, you and the friend (or friends) will share ownership of the home, and you’ll all live there.
This situation makes sense when you want to build up equity in a home rather than paying rent (and building someone else’s equity). Home equity is a critical factor in wealth creation in the U.S., so buying a home could boost your and your friends’ financial situations. If the home appreciates in value and you eventually sell, you’d both get a share of the profits.
The benefits of buying a home you and your friend will live in together is that you enjoy the rewards of homeownership and have a roommate you already know and get along with to split the costs.
The downside is that friendships aren’t always forever, and living in close quarters could precipitate the deterioration of an otherwise good relationship. Then, you could be in a situation where you don’t get along as roommates anymore, but you are financially bound to the arrangement. This tension and financial stress could escalate your interpersonal problems pretty quickly.
Then there’s the issue of what happens when one party runs into financial problems. For instance, if someone loses a job or becomes ill and unable to work, the mortgage and other bills still must be paid. When the liability shifts to the other party, it can cause disagreements and, potentially, the loss of the home to foreclosure.
“Another complication could arise if one owner passes away, depending on how the friends hold title to the property,” says Olivia de Oliveira, a licensed Realtor in the Memphis, Tenn., area.
If you hold joint tenancy and your friend passes away, you automatically take over their share in the home. But if you have a “tenants in common” agreement, their share of the home passes to their designated heir, not to you. Then you’ll have to work with the heir to either buy them out or negotiate on whether to sell or keep the home. That can be painful and complicated, especially if you’re at odds on the decision.
De Oliveira points out another possibility: “It can get very messy if one owner later wishes to sell and the other doesn't. It could even necessitate getting the courts involved by bringing a suit for partition.”
In a suit for partition, a judge determines what is to be done with a property when the co-owners cannot agree.
So, as Graber recommends, put everything in writing. How will you handle it if one person wants to sell and the other doesn’t? What will happen if one person can no longer work and therefore can’t afford their portion of the mortgage payment?
Work with an attorney to ensure your shared ownership agreement is ironclad and that you and your friend understand all of the terms and responsibilities.
Maybe you already own a primary residence, but you’re looking to get into real estate investing. Or you’re not ready to commit to one place yourself, but you can’t pass up a chance to start earning rental income in the current red hot real estate market.
In either case, going in on an investment property with a friend might seem like the way to go.
It’s not uncommon for business partnerships to come out of friendships, and what’s better than earning money with your best buds?
But buying a home as an investment property with a friend raises the same issues as buying a primary residence.
What happens when someone wants out of the partnership? How will you handle that?
Zachary Bodine, a branch sales manager with Fairway in the Washington, D.C., area, says many people don’t consider the transfer tax implications when one person wants to leave the investment arrangement.
If you are not married or related, depending on the state or jurisdiction, there could be a significant tax burden when transferring ownership of the property. “For instance, a $700,000 home in D.C. could carry a transfer tax of around $20,000,” he says.
In theory, the rent paid by tenants will be enough to cover your monthly mortgage payment. But there are still other financial obligations to account for. What if someone can no longer afford their share of property maintenance or fees to a property management company? That can create a difficult situation fast. The upside is, with an investment property, you don’t have the added stress of living together.
One other thing to consider is that the barrier to entry for investment properties is higher than for a primary residence. Unless you buy a multifamily property and plan to live in one of the units as your primary residence, you’ll need to apply for an investment property loan.
These have higher credit score requirements and higher down payment requirements, as well as higher interest rates. So you wouldn’t want to buy an investment property with a friend unless you know they have a strong financial profile.
Pros and cons of buying a house with a friend
How to buy a house with a friend: 5 steps
Buying a home with a co-borrower will look much like buying a home with a spouse. The lender will require both borrowers to complete a loan application and go through the approval process.
Before you approach a lender for pre-approval*, you should have a conversation with your co-borrower, so you know the condition of one another’s finances.
If either of you has a low credit score, high debt-to-income ratio (DTI)**, or only a small amount of savings for a down payment, it could affect the kind of loan you are eligible for and what kind of interest rate you’ll get for your loan.
Even if you’re both in a good place financially to buy a home, there are other key issues to discuss as well. Talk through how one or more of the following scenarios would affect all borrowers:
- Unexpected expenses (such as major repairs to the home)
- Domestic disputes
- The house becomes uninhabitable due to damage from storms or climate hazards
- Legal claims or lawsuits connected to the property
- Inability or unwillingness to share expenses
- Temporary or permanent disability
- One person wants out of the arrangement
- Inviting others to reside at the property
These are just a few of the things that could come up over the course of a co-ownership arrangement. Work with an attorney to figure out how to prevent these issues from devolving into a contentious legal matter between you and your friends.
In the case of death, you may create a legally binding document, use special language on the deed, or even designate how the property should be handled in the will.
De Oliveira suggests how this might work with the deed: “One way to avoid such a situation would be to include a ‘right of survivorship’ on the deed to the property. Right of survivorship means that if one owner dies, their interest in the property passes wholly to the surviving owner instead of passing to their heirs.”
She adds that this could create other problems, however. “The deceased owner's heirs could be upset at being cut out of the inheritance,” she cautions.
Another strategy would be to get mortgage protection insurance for each of the co-borrowers, which would pay off their portion of the mortgage in the event of their death.
Before you commit to a home loan with a friend, make sure you have discussed each of these scenarios and discussed how to handle them with an attorney.
“If you have decided to buy a property with your friend, be sure to make a fair and justified arrangement,” says Kimo Quance, a Realtor in the San Diego area. “Get everything written on a separate legal contract on which both of you agree.”
Whether you’re buying a house with one friend or four, everyone who will be on the loan must qualify with your mortgage lender. Getting preapproved will tell you how much you can collectively afford, and what your monthly payments might look like.
Your mortgage lender will ask for a number of documents from each co-borrower, including:
- Income verification
- Proof of employment
- Bank statements
- Income tax filings
- Proof of down payment funds
Your lender will also pull each co-borrower’s credit scores from the three credit bureaus – TransUnion, Equifax, and Experian. They will use the middle credit score of the borrower who has the lowest credit score on the application.
Here’s what that means. Let’s say three friends are buying a house together, and these are their credit scores:
The bolded scores are each borrower’s middle credit score, which is what lenders use for mortgage applications. Friend 3 has the lowest scores, so the lender will use 660 – the friend’s middle score – on the application.
In this case, Friend 3’s credit scores are significantly lower than Friend 1 and Friend 2. So much so that the other two might reconsider having Friend 3 on the loan, because Friend 3’s score will likely result in a significantly higher interest rate.
This is why it helps to have an idea of everyone’s FICO credit score prior to getting preapproved.
Once everyone is preapproved and you’ve decided to move forward on buying a home together, you can contact a real estate agent and start looking at houses.
Here again, you’ll want to have had several conversations about what you’re all looking for in a home. What are your lifestyle needs? Does everyone work remotely? Will any children or romantic partners be living in the house as well? How much square footage do you need? What neighborhoods are you looking in?
Be sure to have these conversations beforehand so you’re on the same page when looking at properties and deciding when to make an offer.
After you get an offer accepted, your loan application will be processed, including being reviewed by your lender’s underwriting department. The underwriting team may request more financial documents from any or all of the co-borrowers, and everyone should submit the information as soon as possible to keep the process on track.
During this time, which is known as your due diligence period, you can have an inspection done on the house. Your lender will also order an appraisal on the home to determine its value.
Discuss with your co-borrowers what you’ll do if the appraisal comes in low or the inspection turns up major issues. Will you negotiate for a lower price? Are you willing to pay the difference between the appraised value and the purchase price in cash? If so, what’s the limit? These are all potential conflicts that should be hashed out prior to going under contract.
By the time you close on the home, you should feel confident in your co-borrowers and the home you’re buying. At closing, you’ll sign your loan documents and officially become joint homeowners.
You’ll get the keys to the home when the loan is funded, which is usually within a few days of closing.
Buying a house with a friend FAQs
Yes. The process is similar to purchasing a home with a spouse or significant other. Both borrowers will need to apply for their loan, and the lender will pull both of their credit scores. Both borrowers will also need to submit proof of income and employment, as well as information about their debts, savings, and assets.
Yes, you can. Each borrower will complete a full loan application, and the lender will pull each person’s credit history. It’s important to discuss any potential financial pitfalls or changes in circumstance that could affect the home before you close. You’ll also want to work with an attorney to create a contract spelling out how various scenarios will be handled, as well as the best way to take title to the house.
Buying a home with a friend can provide some advantages, such as increased purchasing power and decreased costs of homeownership due to the shared expenses. However, there can be significant disadvantages as well. If one person wants to sell and the other doesn’t, or one person is no longer able to pay their portion of the mortgage, that can create serious financial and interpersonal conflicts.
Know before you commit
Buying a house with a friend will always have risks. But you can determine whether it’s the right move by having candid conversations about the pros and cons, and about your individual finances. Ask for – and provide proof – as well. Talking about money can be uncomfortable, but you both need to be honest if you’re going to make this financial commitment.
Meet with a lender together to discuss your options, and be prepared to show each other paystubs, tax returns, credit reports, bank statements, and other documents your lender will require. Ask each other questions about anything that doesn’t make sense or seems like a red flag.
And trust your instincts. If you’ve known someone a long time and you know they’ve struggled financially in the past, ask them what’s different now and how they’ve changed. Many people turn their financial lives around, so they may be a great partner with whom to buy a home.
But if your gut tells you that they haven’t quite stabilized their money situation yet, or you’re not absolutely confident they’ll adhere to your agreement, listen to that feeling. There are lots of ways to buy a house, with or without co-borrowers. It’s better to preserve your friendship – and your finances – than to make such a big purchase without total confidence and trust.
The information in this article does not constitute legal or tax advice. Please consult a legal and/or tax advisor regarding your specific situation.
*Pre-approval is based on a preliminary review of credit information provided to Fairway Independent Mortgage Corporation, which has not been reviewed by underwriting. If you have submitted verifying documentation, you have done so voluntarily. Final loan approval is subject to a full underwriting review of support documentation including, but not limited to, applicants’ creditworthiness, assets, income information, and a satisfactory appraisal. **Debt-to-income (DTI) ratio is monthly debt/expenses divided by gross monthly income.