Dangers Of Buying A Home With Friends And Family

If you ask the top real estate agents in Nanaimo if buying a home with a friend or family member is a bad idea, they’ll tell you that there are some definite dangers involved. But that doesn’t mean you shouldn’t do it, as long as you know what you’re getting into. Here are some important things to consider before you buy a home with someone else.

Why buy with friends and family in the first place?

Let’s begin by looking at some of the reasons why people buy a home with friends and family. Sometimes it’s to pool funds together and purchase a rental property or vacation home. Other times, it’s to buy a home that’s difficult to afford without some financial assistance.

If two people are already living together and have a system for sharing expenses, it can make more sense to buy instead of wasting money each month paying rent. Plus, rents usually go up every year while a 30-year mortgage has a fixed payment each month.

Investing in a rental property is also easier with two people. That’s because down payments on non-owner occupied property are usually larger, interest rates are a bit higher, and there’s work involved in dealing with tenants and managing the rental.

The process of applying for a mortgage is basically the same as well. It doesn’t matter if the applicants are a couple, business partners, roommates, or brother and sister.

Dangers of buying a home with friends and family

The dangers of buying a home with friends and family fall into general areas: emotional and financial. Let’s take a look at the risks with each:

Emotional entanglements

• Disagreement and hurt feelings over responsibilities like making repairs, paying the utilities, and how any tax benefits of owning the home are shared.
• Moving out or walking away is also much harder when you’re both on the hook for the mortgage and maintenance fees.
• Harder to agree on contract negotiation when the time does come to sell – in fact, many real estate agents in Nanaimo say that lack of cooperation is one of the hardest things about selling a home that’s jointly owned.

Financial risk

• Mortgage rate may be higher if there’s a big difference in credit scores between the individual borrowers.
• Paying the mortgage late – if one person loses their job, for example – will damage the credit scores of everyone who has their name on the loan.
• Getting other loans may be harder even if the mortgage payment is split 50-50, because a lender will calculate a debt-to-income ratio as if the loan was all yours.

There are some advantages

Now that you know the potential risks, here are some of the rewards in buying a home with a friend or family member:

• Enter the housing market sooner since it’s becoming harder and harder to save up for a down payment when home prices keep rising.
• Qualifying for a mortgage is easier because you can pool your income and credit histories.
• Able to keep more of your personal funds even if you do have the money to purchase a home alone.

Rules to follow before buying with friends or family

Lastly, if you do decide to take the plunge and buy a home with friends or family, be sure to follow these rules:

• Come clean about your personal finances with the other borrower, because transparency up front will avoid unpleasant surprises and hurt feelings down the road.
• Put down in writing what each person is responsible for, including the mortgage, special assessments, repairs, taxes, and tax deductions.
• Select the right option for legal ownership of the house – if you don’t already have a real estate attorney, your agent can refer you to one.
• Discuss ahead of time the possibility of one person selling their share of the house and if the other has the first option to buy them out.