Should You Buy A Home With A Friend
You and your best friend have been living together since college. It started with a small dorm room and now that you are both thriving in your careers, you have a nice apartment overlooking the pool. As the parade of the “wrong people” stream in and out of your lives, you wonder if it makes sense to buy a home together and enjoy the financial benefits.
Buying a property with a friend is a big decision, but if neither of you foresee a change in your lifestyle in the near future, it might make sense.
Benefits Of Buying A Home With A Friend
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Easier to qualify for a mortgage: Let’s face it two incomes are better than one. If you are applying with a friend, the lender can consider both applicants income and credit. This can allow you to have greater purchasing power and more choices in the home.
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Shared Costs: Buying and owning a home can be expensive. Financing a home with a friend means splitting the down payment, mortgage payment, closing costs and costs of ownership.
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Home Equity Profit: Aside from the sense of pride in ownership, the home purchase is also a sizable financial investment. Hopefully the home will appreciate in value during the home ownership time period. Currently the IRS allows a significant portion of the profit to be realized tax free when the home sells. See you tax professional for details.
- Mortgage Interest Deduction: Unlike rent, the mortgage interest portion of the payment is tax deductible. You and your friend will determine how much of the mortgage interest you will each deduct from your taxes. This can reduce your overall housing cost if the deduction is large enough.
Concerns About Buying A Home With A Friend
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Lack of mobility: This is where you must talk about your lifestyle and any future options. What happens if you get that great job offer half a country away? Owning a home with a friend might be more complicated that other types of ownership. Owning a home alone could allow you to sell or rent the home without consideration of another person. Would your friend want a roommate? Would they be willing to sell if you needed to? These are issues to talk about in advance.
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Potential Credit Damage: When you get a mortgage loan, both parties are equally responsible for the mortgage payment. You might be very prompt with your payments each month, but if your friend is not, then you will either be in the position of paying both halves or suffering the consequences of a mortgage late….or worse. Unforeseen things happen in everyone’s lives, if you are planning to buy with a friend, don’t be shy about talking in advance. Understand how much savings are in reserve and the contingency plans if one of the owners has a financial set back.
- Difficulty Obtaining Other Loans: The entire mortgage loan balance will show up equally on both borrowers’ credit reports. Even though you are only responsible for half the payment and half the balance, this will not be separated on the credit reports. It might appear that you are over extended based on the large loan and make getting credit hard or impossible.
Buying a home with a friend can work and work well. There are huge advantages to homeownership and if you are unable to qualify alone, a friend could be the right solution. The key is to have open, honest and detailed conversations in advance. Understand the potential issues up front and plan for all contingencies. Get some advice from a tax professional as well as an attorney. Make sure your rights are protected and that you have a solid legal agreement about the rights and responsibilities as well as your interest in the home, title. Careful planning will ensure that home ownership is a positive investment for you and your friendship.
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