When you think of more than one name on a mortgage application, you probably assume that it’s a married couple. However, there are lots of other people who enter into buying a home together – siblings, parents and their children, extended family, non-married couples, and even friends.
On the positive side, sharing the burden of a home loan and all that goes into being a home owner often creates an opportunity that wouldn’t be possible for any of the borrowers on their own. However, making a big commitment as complex as sharing a home and a mortgage with someone means that you have a long-standing financial obligation to each other.
We connected with Mike Venable, head of underwriting at TD Bank for his thoughts on home sharing to help you decide if it’s an option worth exploring.
The Pros of Co-Owning a Home
Venable’s quick take is that more borrowers makes makes loan qualification easier. “With more challenging lender standards when it comes to credit score, debt to income ratio, etc., it’s easier to qualify if you bring in more income to offset the debt,” he explains.
If all of the new borrowers will be occupying the new home together, you also get to share expenses such as splitting the utilities. Having joint ownership helps offset some of the big expenses of owning a home, says Venable.
There’s also the perk of getting to claim mortgage interest on your taxes, but keep in mind, you’ll have to split the total amount with your co-borrowers.
Joint Ownership Downsides
While joint ownership of a home is a great idea in theory, it only works if all parties are on board and willing to keep up with the financial commitments. If not, it will cause headaches and disagreements down the road.
“It’s much more difficult to walk away from a mortgage when you have more than one borrower,” says Venable. One person can try buying the other out and then try to refinance, but either individual might not be able to qualify on his or her own.
The big issue is if one person suddenly can’t or won’t pay his or her share. That will ultimately affect all parties. “You may be responsible for only part of the mortgage, but if your partner doesn’t pay, there is potential credit damage for you. Ultimately, any delinquencies would be hitting both of you, not just one,” says Venable.
How to Take Title
Also consider what happens in the unlikely event that one owner passes away. That can wrap the surviving owner in legal spider webs.
As Realtor.com explains, when each co-owner has an equal share of the home, the official status is known as “joint tenants with right of survivorship” (JTWROS). That’s another way of saying that title is held between all co-owners. If a co-owner dies, their share goes to the other owners. In a “tenants in common” (TIC) agreement, each co-owner can pass along their ownership through a will, meaning the remaining tenants might end up sharing the home with someone they never intended to. This is an area for which you should consider getting legal advice.
There are no lending rules against purchasing a home with someone who is not your spouse or family. Some common relationships that co-own a house together are as follows.
- An adult child buying with his or her father, mother, or step-parent.
- Co-ownership with a fiancé, fiancée, boyfriend, girlfriend, or partner.
- Two individuals owning an investment property together.
- Two married couples buying a second home.
- Two or more families buying a large home to live in together.
These situations are just to name a few. All of these and more are permitted with current lending rules.
Qualifying for a Shared Mortgage Loan
As far as qualifying for a home loan with another person signed on, the process is much the same as it would be otherwise, says Venable. “We look at every application the same way based on our product guidelines, and we look at the big picture. We factor in credit score; we look at a two-year history of income for both wage and self-employed borrowers; and we look at debt-to-income ratio,” he explains.
Although Venable is not in the business of giving legal advice, he’s seen those who go into home sharing situations have agreements drawn up by a lawyer so it’s specifically laid out as to who is responsible for what. For example, there could be different percentages of ownership, and therefore, that might affect how the loan is paid back. In the case of an unmarried couple that breaks up, how will that work? In other words, it’s a good idea to really have a plan in place that’s outlined in writing before you move forward with such a transaction.
Co-Ownership Mortgage Loan Programs
In home sharing situations, Venable says most borrowers seek fixed rate conforming loans. “Most people like the longer-term stability over time, especially now because rates are so low,” he says. In some situations in which the parties know they don’t plan to stay in the home for a long time, they might choose an adjustable rate mortgage for five, seven, or 10 years.
Specialty loans like the VA Loan program wouldn’t work since those are geared toward active military and/or veterans and their spouses. And FHA is mostly used by married couples as opposed to non-married borrowers, says Venable.
All in all, home sharing offers an opportunity for many folks to stop paying rent and become a part owner of a home. “Just make sure there’s a trust factor and an understanding of expectations,” says Venable. As long as you’re comfortable with your co-owners, you can purchase your dream home a lot sooner than if you were on your own.