What You Need to Know About Co-Owning a Home
If you’re eager to become a homeowner but you’re unable to afford the down payment or monthly mortgage payments on your own, you might want to consider co-owning a home. Co-owning a home isn’t just for married couples. Siblings, parents and their children, partners, and even friends can own a home together.
But co-owning a home is a big commitment that requires a long-term financial obligation between two people. Before you make the decision to co-own a home, you need to fully understand how the process works.
The way your title is set up will determine who can sign documents related to the property and define how the property is transferred in the event of a co-owner’s death. There are two main options for taking a title when it comes to co-owning a home and each has its own set of pros and cons.
- Tenancy in Common (TIC): Tenancy in Common is a popular choice for friends, partners, or other unrelated individuals who decide to co-own a home together. With TIC, each individual owns their share of the property and they don’t have to get approval from the co-owner if they plan to sell their portion of the property.
To receive financing for a TIC, each owner must qualify for the loan separately and each owner signs a separate promissory note and deed of trust.
- Pros of Tenancy in Common: A TIC allows for flexible financing. If you have a large amount in savings but a small monthly income, and your co-owner has minimal savings but a big monthly paycheck, you can divide the payments up to suit those factors.
- Cons of Tenancy in Common: With a TIC, your co-owner can sell their share of the property at any time without your approval. This means you may end up co-owning a home with a total stranger.
A TIC doesn’t include a Right to Survivorship, so if your co-owner dies, they can leave their share to whomever they please. This becomes a risk if the new co-owner decides to sell their portion of the property leaving you on the hook to either buy them out or file a partition action.
- Joint Tenancy: With joint tenancy, the co-owners have equal rights and obligations. This form of ownership includes a Right to Survivorship which means that when one co-owner dies, their share of the property automatically passes to the other owner.
Joint tenancy is financed through a shared mortgage which means if your co-owner doesn’t pay, you are responsible for their portion.
- Pros of Joint Tenancy: Joint tenancy makes homeownership more accessible. With this form of co-ownership, borrowers can split the down payment and combine their credit scores and debt-to-income ratios allowing them to possibly qualify for a higher loan amount with better terms.
Joint tenancy also includes Right to Survivorship, allowing for a smooth transition if a co-owner dies.
- Cons of Joint Tenancy: With a joint tenancy, you are responsible for your co-owner’s portion of the mortgage should they be unable to make their payments.
And while it may be a good thing that you need to approve your co-owner’s sale of their share of the property, it can also be challenging to manage these situations. All the decisions related to the property must be made jointly, so if you don’t have a good relationship with your co-owner, small decisions can turn into big disagreements.
There aren’t any rules against who you can co-own a home with. Here are some common co-ownership scenarios:
- An adult child buying with his or her father, mother, or stepparent in which they will both live.
- A parent assisting a child with the purchase of a home they will not all live in together.
- Co-ownership with a fiancé, fiancée, boyfriend, girlfriend, or partner.
- Unmarried individuals own and live in a property together.
- Two individuals owning an investment property together.
- Two married couples buying a rental property.
- Two or more families buying a large home to live in together.
The Importance of a Co-Ownership Agreement
Creating a co-ownership agreement prior to purchasing a property with someone else will help you lay the framework and rules surrounding your agreement. There are a variety of scenarios to consider and include in the co-ownership agreement:
- Who has the right to occupy the property?
- Who will originate the mortgage?
- Who is obligated to pay the mortgage?
- How will taxes, insurance, and maintenance be paid for?
- What happens if there is a breach in the agreement?
- What if an unmarried couple living together breaks up?
- How will disputes be handled?
- What happens if one party wants to sell?
- What happens if one party dies?
A real estate attorney can help you identify all the information you should include in this agreement.
Co-owning a home increases homeownership opportunities across the board. Just make sure you’re comfortable with your co-owner and the terms of your co-ownership agreement.