February 4, 2022
With rents skyrocketing and remote work becoming the norm, first-time homebuyers continue to enter the real estate market. In recent years, a trend has been growing for those unmarried borrowers to buy a home with a partner or friend. Let’s dig in and examine the pros and cons.
According to the 2021 NAR Home Buyers and Seller’s Generational Trends, in 2020, first-time homebuyers composed 31% of home purchases. 62% of 2020 purchases were by married couples, and 38% were unmarried. Sales have remained constant from 2019 despite the pandemic. And with home prices going through the roof, it’s not surprising multiple incomes are needed to qualify, especially since many millennials have substantial student loans.
Co-Borrower vs. Co-Signer — Mortgage
If you can’t qualify for a loan on your own either because of income or credit, consider getting someone to co-sign or be a co-borrower. It’s not uncommon for a parent to co-sign for a vehicle, student loan, and sometimes a home. Let’s go over the difference between a co-borrower vs. a co-signer.
Co-signing is a big decision not to take lightly. It affects the co-signer’s debt-to-income ratio and can affect their credit if payments aren’t made on time. Consider the co-signer the backup person if the primary borrower doesn’t pay.
What is a co-borrower on a mortgage? A co-borrower takes on the debt with the other borrower. Both are equally responsible for the loan, and they work together to pay it off.
So when two or more (sometimes as many as four) individuals purchase real estate together, they are co-borrowers.
Plan Ahead For the What If’s
Although it may be hard to consider, things change, and the future isn’t always crystal clear. Just like buying a home with a spouse, there’s always the possibility there could be a split where friends or partners want to go their separate ways. It’s best to plan an exit strategy and work out the details before deciding to buy a home with someone other than your spouse.
Some things to think about before applying for a mortgage with a friend or partner may include:
- How do you want to hold the title? Your attorney or title company can help with this.
- What percentage ownership does each person have?
- Create a buyout agreement
- What portion of the mortgage payment does each person pay?
- What you’ll do if one of the co-borrowers wants out.
- What happens if one is transferred out of town for their job?
- Should you set up an emergency account for mortgage payments?
- a. If so, how much should each person contribute?
Your circumstances will be different but think about all the “what ifs” before applying.
The Advantages of Buying a Home With a Friend or Partner
Aside from figuring out the ownership issues and legalities, being a homeowner vs. a renter has so many advantages. And buying a home with someone you trust makes the experience even better.
Homeownership offers a future of stability. No more landlords or risk of rising rents. Plus, you can create the environment you’ve always wanted.
Investigate Your Mortgage Options
Every mortgage product has its particular guidelines regarding co-borrowers. Your loan officer can go over the options of each. They’ll let you know the price range you can consider and how much you’ll need to have for a down payment and closing costs. From there you can decide who pays how much.
Difference of Renter vs. Homeowner
Renting or leasing a home is relatively easy. You’re either on a month-to-month, 6-month, or 1-year lease. When the contract is up, you can move.
But when you’re a homeowner, you don’t have that luxury. You either have to rent out the property, refinance it with the remaining borrower, or sell it and pay the home loan off.
Can a co-borrower be removed from a mortgage loan? Although there may be ways to remove a co-borrower, the easiest is to refinance.
Buying a home is exciting, but it is a big commitment. If it’s with a friend or partner, by considering all possible future eventualities and getting agreements in writing, you’ll protect yourself, the other party, and your relationship.