If buying a home of your own is not something you can financially handle, it’s not unusual to own one with another family member. Or two. Or three.
Realtor’s Erica Sweeney reports that 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. Contrary to popular belief, however, the trend isn’t just tied to affordability issues or living in high-cost places.
Sweeney quotes a mortgage expert, who tells her that some baby boomers are electing to co-buy a home so they can age in place with the help of family members. It’s no easy decision, however. Homeownership is generally the biggest investment people make in a lifetime, and participating family members must understand this is a long haul journey.
Things to consider include loan pre-approval, assets of all involved, verifications, such as income, assets, and credit scores. They apply to each borrower -- not just one or two. The assets of all the parties on the application are combined into one total figure strengthening the income or asset portion of the application. That means, however, it’s vital to check the credit scores of all co-borrower loans, whether between spouses or other family members. The debt-to-income ratio is calculated by dividing ongoing monthly debt payments by monthly income. So each borrower needs to qualify individually with his or her own credit score. Be advised that 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.
While everyone is equally on the hook for the repayment, 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. It also means that all parties on the loan will have their credit equally affected if a payment is partial, late, or missed.
Down payments can be split among borrowers, but not everyone has to live there. “If you decide to invest with your metal band drummer brother on a property, it doesn’t mean you have to live with them,” says Sweeney. “A non-occupant may contribute income for the loan, essentially acting as a co-signer to help everyone else qualify for the mortgage. By the same token, involving a non-occupant may also affect the type of mortgage you can get. Anyone buying a second home or investment properties alone or with others may also limit mortgage options.
What if it’s a bust? If someone’s finances change and any individual wants to move out or get out of the mortgage, it’s no cakewalk. 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,” one mortgage expert says, as this process requires your relative’s approval and agreement.
A kind of family prenup might be in order here. “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,” says Sweeney. “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.”