Can my friends and I buy a house together?

Q: I am currently renting with three friends. I am interested in knowing if we can buy a house together that we all would live in? Would we all have to qualify? Would it be considered an investment property or owner-occupied? If you could, please send me additional information regarding this matter. Thank you for your time.

A: The answer is "yes," you can certainly all buy a house together, and if you live in the property, it would be considered owner-occupied. Since you are unrelated, it would most likely be done as a tenant-in-common transaction or similar arrangement.

All of the people involved in the transaction will need to qualify for the mortgage. You'll want to all check your credit reports and scores and look to clean them up and improve them well before you start. The lender is required to use the median score for each borrower as reported by the three major credit bureaus; the lowest median score will be used as the "representative score" to determine your eligibility to get the mortgage (and will influence what rates and terms you get).

Buying a home is a serious endeavor. In the case of buying with friends, you need to pay special attention to both how the transaction is structured and spell out the terms and conditions of how it can be unwound.

For example, if one of the parties needs to move or wants to sell, the others would need to "buy them out" and refinance to get their name off the deed and mortgage. This can be inconvenient and costly, especially if mortgage rates have risen when that needs to occur, and it can be difficult if not impossible to get names off the deed and mortgage without refinancing. Of course, this also presumes that the remaining owners will be able to qualify for a new mortgage on their own, regardless of market conditions. In addition, should any one of the owners decide to move or stop paying, the other remaining owners would still be liable to make payments even for them if the vacating party's name is still on the mortgage and title.

Friends are all well and good, but this is more of a business transaction than a friendship one.

Before you all jump in with both feet, you'll want to sit down and talk to a lawyer. You may all also want to discuss where you expect to be in the future, and when that future might start for each of the parties involved. There are any number of issues you'll need to settle beforehand, including how to proceed in the event that one of you wants or needs to break the deal, how you will budget for maintenance and repair costs and more. It would be a good idea to have everyone's responsibilities written down and signed by all parties to prevent future misunderstandings.

Given the costs of acquisition (down payment, mortgage costs) and disposition (commission when the home is sold), buying a home is usually best as a longer-term commitment. If it doesn't look as though such a time frame is in the cards for you and your friends, continuing to rent may be the way to go.

For more details, see Buying with family or friends: Clever or crazy?

Ask the expert
Keith Gumbinger
Keith Gumbinger
Mortgage Expert
Vice President, HSH.com
About Keith: Mortgage market observer and analyst with 35 years experience... (more)
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