Posted by Collette | Posted in Home Mortgages | Posted on 14-12-2009
So you have been living with your girlfriend for awhile and you have decided that buying a home together is a great next step. Or imagine this: you are single, unattached and ready to buy a home. You don’t make enough money to qualify for the mortgage on the home you want to buy. You think, “Why not buy the home with a friend?”. Makes sense, you and your buddy get along. He is neat, clean and seems to pay his bills on time. Why not?
These are just a couple of examples of situations people find themselves in everyday. Mortgage guidelines allow up to four (4) co-borrowers on a loan. These transactions can work out wonderfully. Everyone contribute a little bit and everyone reaps the benefits. Much better than throwing your money away on rent. But there is a potential for things to turn out very badly. It is important to think about the what ifs. What if there is a fight, one person loses their job or is a flake, what if someone dies, what happens when one friend gets married? It is always best to hope for the best but plan for the worst.
These types of purchase arrangement are no different than any other business transaction. Make sure you define the contract very clearly. You should put everything in writing. Even if your coborrower is a significant other with whom you plan to spend the rest of your life. Honestly, married couples should discuss some of these things openly as well. Especially if you are in a 2nd marriage, you are probably bringing more assets into this realtionship than the first time around. The following is a short list of things you need to discuss before you begin the prequalification process.
1- How will you hold title? Make sure you review the different types of vesting. There are several ways to hold title that can have a dramatic affect should one person die.
2- Discuss equity percentage. Are you going to split the asset 50/50? Or is one person going to receive a larger percentage. This can be affected by things like how much one pays towards the down payment or even monthly payment.
3- Down Payment. Is this going to be a 50/50? Most loans now require a down payment. If this is not going be 50/50 make sure you have a clear agreement as to how this will be reconciled later. Is someone going to make extra payments to payback their equity investment? Or will it be paid back when the property is sold or in the event one party wants out to cash out.
4- Monthly Payment. 50/50 or is someone’s income going to be covering a larger portion of the payment? This should also be considered like #3 in how the equity later is going to be split.
4- Exit strategy. Make sure you consider the end. How you will divide equity when the home is sold or one person just wants to cash out.
When a romantic relationships or friendships are involved people often don’t want to discuss these details. When there is a marriage the law will somewhat protect both parties especially when children are involved. Even then you need to be aware of the law since it will lean toward 50/50 rather than percentage of contribution. Which might be an issue in a 2nd marriage. However, when you are not married you need to approach the transaction the same way you would approach any joint business venture. One final thought, if later you want to cash out of your investment but the home is not going to be sold. Consider refinancing the loan into the other borrower’s name. Refinancing is a great way to cash out your equity out of the home. While at the same time removing your name from the mortgage loan. This insures that your credit is protected should the other person run into financial problems down the road.
