Sharing a Home and Mortgage With Family Members? Here’s How To Not Get Burned
Not sure you can buy a home on your own? Or handle a monthly mortgage payment? Here’s an intriguing—if somewhat tricky—option: You could buy a property with a family member (or three).
Families getting mortgages together is a scenario lenders are seeing more frequently, whether it’s siblings jointly buying a home, or adult children and their parents pairing up on an investment property,
It turns out, the trend isn’t just tied to affordability issues or living in high-cost places.
“Some baby boomers are electing to co-buy a home so they can age in place with the help of family members,” says Sherry Graziano, head of mortgage experience at Truist.
Still, it’s imperative to think about the commitment long and hard, whatever the motivation for buying a home with someone you’ll see at a family reunion. Homeownership is generally the biggest investment people make in a lifetime, and participating family members must engage for the long haul.
Here’s what to ponder before jointly buying a home and getting a mortgage with a family member, according to lenders.
Strength in numbers
“Purchasing a home together can be an incredible asset to a family, and help them grow their wealth over generations,” says Graziano. Buying a home with a family member typically works the same as when spouses purchase a home together. There is one mortgage tied to the home and multiple co-borrowers.
Each family member would be included in the pre-approval, full mortgage application, and underwriting processes. All the traditional verifications, such as income, assets, and credit scores, apply to each borrower.
And the assets of all the parties on the application are combined into one total figure. In this way, co-borrowers strengthen the income or asset portion of the application.
Beware of relations with low credit scores
All co-borrower loans, whether between spouses or other family members, are underwritten based on a combined debt-to-income ratio, calculated by dividing ongoing monthly debt payments by monthly income, says Stephanie Hawley, assistant vice president of sales at Flagstar Bank. So each borrower needs to qualify individually with his or her own credit score.
Note: The lower of the scores is used for the overall loan qualification, which can affect your mortgage interest rate, down payment requirement, mortgage terms, and type of loan product you may qualify for.
Approved mortgage loans are reported on each borrower’s credit reports for the life of the loan, meaning everyone is equally on the hook for the repayment. But that doesn’t mean if you’re a one-third owner you are responsible for only one-third of the loan. If Uncle Henry goes into default, each co-borrower is still obligated to repay the full loan.
And all parties on the loan will have their credit equally affected if a payment is partial, late, or missed.
The upside of the downpayment
Down payments can come from various sources—it’s up to borrowers to decide who pays what, Graziano says. One borrower can put all the money down, or it can be split among borrowers. This can be a massive plus if you’re struggling to scrape up a 20% down payment.
You don’t all have to live together
If you decide to invest with your metal band drummer brother on a property, it doesn’t mean you have to live with them. A non-occupant may contribute income for the loan, essentially acting as a co-signer to help everyone else qualify for the mortgage.
Keep in mind having a non-occupant involved could affect the type of mortgage you can get.
“Certain loan programs allow non-occupying homebuyers, while others may not,” Hawley says.
Other scenarios involve family members buying second homes or investment properties together, she says. These may also limit your mortgage options.
You can’t sell or refinance on your own
If things don’t work out living together or co-managing the property—or someone’s finances change—you may want to move out or get out of the mortgage. But it’s not that easy.
You can’t sell or refinance the home without all co-borrowers on the loan being in agreement.
“Should a family member later decide they want to exit the ownership or debt obligation of a home, they may have to refinance out of the property, often cashing out any equity or settling funds due with the remaining owner,” Graziano says. This process requires your relative’s approval and agreement.
Protect yourself with a legal agreement
Work out who is obligated for how much on the monthly mortgage payments, as well as who is on the hook for how much when it comes time to pay taxes, insurance, maintenance, utilities, and other expenses before signing on the bottom line of the loan.
“Who pays it is something worked out by the borrowers outside our transaction,” says Hawley.
Once these details are nailed down, have a contract drawn up to outline each owner’s fiscal responsibilities. A legal document will help to keep problems from popping up.