The rising cost of living, escalating mortgage rates, and limited housing inventory have made homeownership increasingly difficult for many would-be homebuyers.
As a result, some people are buying a home with an unmarried partner, a friend, a family member, or multiple people. This can be a great option for those who do not have the funds for a down payment, the ability to manage a monthly payment on their own, or do not have the credit history to obtain a loan without the help of others. It’s important to carefully consider several factors when making such a significant financial and legal commitment with someone other than a legal partner.
The first step is to consider your ownership options and establish your stake in the property. There are generally two ways to purchase property as nonspouses: joint tenancy and tenancy in common.
Most often used by married couples, joint tenancy—an equal partnership that provides both individuals with equal rights and interests—can also be a viable option for other types of cobuyers. Just note that the property must be acquired simultaneously for a joint tenancy to apply. In addition, this form of ownership includes rights of survivorship, which means that if one partner passes away, their share of the property automatically transfers to the remaining owner. (These shares cannot be transferred to any other person, even in nonspousal arrangements.)
Tenancy in common (TIC)
TIC is one of the more common ways of splitting ownership with one or more individuals. Although the ownership structure can vary by state, the general components are the same: TIC requires at least two parties to have ownership, and the arrangement doesn’t have to be permanent. In contrast to joint tenancy, there are no limits to how many parties can own shares in the property. For example, one individual may own 50 percent of the property, while the remaining 50 percent gets divided among several other shareholders.
TIC also allows you to dissolve your ownership at any time. However, depending on the contract verbiage, you may need permission from the other owners to sell your share. And, perhaps more beneficially, this form of ownership does not come with rights of survivorship—allowing you to specify who will inherit your share of the property after you die.
Establish the ground rules
You’ll need to have an open conversation with your cobuyer(s) to ensure that you’re entering into a partnership with someone financially stable, has good credit, is duly employed, and is committed to a long-term arrangement (unless otherwise agreed upon).
Communicate financial expectations
Have open and honest communication about all the financial aspects from the get-go. This includes agreeing on how much to spend on a property and who will contribute to the down payment. Also, ensure that everyone is informed of each other’s finances, including credit scores, outstanding debts, and the ability to contribute to the mortgage and ongoing expenses.
Form a legal agreement
When buying a property with someone other than your spouse or domestic partner, it’s vital to have a clear and legally binding contract, such as a cohabitation property agreement, (which can be crafted by a real estate attorney). This agreement should outline the rights and responsibilities of each co-owner, including the distribution of costs, maintenance duties, and decision-making. It should also include the buyout terms and how the assets will be distributed if the partnership is dissolved.
Explore mortgage options
Owning a property does not necessarily mean you must be on the mortgage. In fact, you can have ownership in a property just by simply being named on the deed—the legal document that proves ownership and allows you to transfer ownership to another person. Evaluate whether you have a stronger financial portfolio to determine if you’d obtain better interest and loan terms by seeking a mortgage together or having just one of you apply.
Have a contingency plan
Make a plan for what to do in case of events, such as a loss of income, health issues, or changes in living arrangements, such as one owner deciding to move. Being prepared in these situations can help mitigate potential risks.
Define an exit strategy
Discussing and establishing a clear exit strategy from the beginning is essential. You never know when life circumstances may change, and a plan for selling the property or buying out your co-owner’s share can prevent future conflicts.
Research insurance coverage
Explore insurance options that protect all co-owners, including homeowners insurance and liability coverage, in case of accidents or damages on the property.
Discuss tax implications
When purchasing as an unmarried buyer, the tax laws only allow one person to claim the tax deductions. With that said, the IRS has specific stipulations regarding interest deductions, so be sure to look them over and agree with your cobuyer(s) on how to navigate this complex issue.
Building trust and respect within the co-ownership arrangement is vital for maintaining a positive living environment. By understanding each other’s goals, responsibilities, and concerns, you and your cobuyers can foster a sense of collaboration that can lead to a successful long-term shared homeownership.