Renting is great in some situations but doesn’t always make the most sense in others. With the recent increase in reduced down payment loan programs, buying may be more affordable than you think. Perhaps you and your roommates are sick of renting and have considered taking the plunge to homeownership. On the surface, this can be a great way to pool expenses, minimize closing costs and get into a house you really like. As great as this scenario can be, it is important to have some difficult conversations prior to making an offer. Without discussing the worst-case scenario, you can both be left with an ugly stain on your credit report that can take years to recover from. If you are thinking about buying with a friend or family member here are four items you need to discuss.
How will expenses be divided?Life is too short to let money come between friends and family. However, too many times it does put a wedge in relationships. It is important that you have a discussion on how household expenses will be divided. If you have never owned a home before it can be a shock at just how many expenses there are. In addition to the basic household bills you should have a plan on basic repairs, maintenance and updates. In most cases the expenses will be divided right down the middle but if someone works from home or has a special circumstance this could be different. The more you can get out of the way with your finances the smoother things will go.
Repercussions of late payments.The first step in the buying process is having your loan officer pull the credit and run an application. If there is a joint application all parties will be on the mortgage. This means that any late payment will have an equal impact regardless of who is the primary or co-borrower. As obvious as it may seem you need to have an honest conversation as to whether you can both afford the payment and all the expenses. Being late on your rent can potentially be impactful but not nearly as much as a late mortgage payment. It can take a full year to recover. If the late escalates to a foreclosure you are looking at several years until you can buy again.
What happens if you want to leave?Nobody ever thinks they are going to break up with a long-time boyfriend or girlfriend or grow apart from a family member. Life has a way of changing when you least expect it. What happens to the house if the relationship suddenly ends? Are you both on the hook for the payments until you sell or find someone else to live with? If the utilities are in someone’s name will they let you transfer them over? There is no doubt this can be a sticky situation, but it is better to have a plan prior to closing than a few years down the road.
When do you sell?Living with a friend may be great for a few years but what happens if they meet someone and decide to move out? They may want to sell and take advantage of any equity, but you may want to continue living there. Instead of getting attorneys involved and ruining your relationship have an exit strategy in place. This strategy can be tweaked through the years, but you should always have some idea of what you will do when the other person decides to move out.
Buying a home with someone close to you can be a great way to pool funds and stop renting. However, you need to have some difficult conversations before getting too far.