What You Should Know About Co-Owning a House
Posted on 21/10/2022 11:18 AM | by NaijaHouses
Home prices have increased at a staggering rate in 2021, leaving many wondering whether or not they can afford to own a home on their own.
In the third quarter of 2021, home prices in the U.S. increased by 18.05%, according to the Federal Housing Finance Agency. As a result, many people, particularly those in younger generations, feel like they've been priced out of homeownership, a key part of the American dream.
If you want to become a homeowner but aren't sure you can afford to do it on your own, co-ownership could be a solution. Here's what to know about how it works, along with the benefits and drawbacks to consider.
Why Co-Ownership Is On the Rise
The average age of homebuyers hit an all-time high in 2020 at 55, according to the National Association of Realtors. The increasing unaffordability of homeownership has left many prospective homeowners, especially younger ones, to look for alternative solutions.
"Millennials are a very creative generation," says Erika Rasure, assistant professor of business and financial services at Maryville University. "But when you have so many of these financial barriers already, your options are limited as is your attainment of this American dream."
Many people who feel priced out of owning a home have joined up with friends or family members to co-buy a home.
In the first quarter of 2018, 17.4% of all single-family homes were purchased by nonmarried co-buyers, according to ATTOM Data Solutions. In 2021, that number is estimated to be 25%, says CoBuy, a company that simplifies the process of co-buying a house.
But navigating co-ownership with someone you're not married to can be a bit trickier.
How Does Co-Ownership Work?
Home co-ownership involves buying a house with one or more other people, such as a partner before marriage, relatives, or close friends. All co-owners will be on the title and likely also the mortgage loan.
The group will need to decide how to hold the title. The two options include tenancy in common and joint tenancy:
- Tenancy in common. With this option, shares of the property aren't divided equally between the owners. Rather, each person's share of ownership is equal to how much money she invests in the property. That said, each person has equal rights to all areas of the property. Also, each owner chooses who receives her share of the property when she dies, so it won't necessarily go to the other owners. If an owner wants to sell her share of the property, she must get consent from the other co-owners.
- Joint tenancy. When buying a property with friends or family with this option, each person shares equal ownership in the home, regardless of how much he invested. However, no one gets to choose his own beneficiaries in the event of death. Instead, the surviving owners automatically take over the deceased person's share, again dividing it equally. Additionally, each owner can sell his share in the home to another person without the approval of the other co-owners.
"One of the biggest reasons to choose joint tenancy is if you want to avoid the property going through probate or to protect it from creditors (if an owner dies)," says Jesse Sheldon, director of operations and broker at Gordy Marks Real Estate.
As you consider both, consult with a real estate attorney to help you determine the best path for your group of co-owners. Also, note that co-owning a house with parents, other relatives or friends doesn't mean that all co-owners must live in the home.
Regardless of which way you choose to hold the title to the home, each owner on the mortgage loan will be equally responsible for the debt.
What Type of Loan Do You Need?
When buying a property with friends or family, you don't need a specialized mortgage loan. Lenders are more concerned with your plans for the property – whether it will be a primary residence or an investment property – and your creditworthiness.
As a result, it's important to take time to shop around and compare different loan programs to determine which is the best fit for you. Consult with a mortgage broker or a loan officer to get an idea of which options would best serve you and your needs.
Keep in mind, though, that there may be limits on how many people can be on a loan. For instance, Fannie Mae's Desktop Underwriter, an automated underwriting system that lenders can use for conventional and government loans, only supports up to four borrowers. If you want more, you'll need to undergo what's called manual underwriting, which can be a complicated process.
Finally, while having a co-borrower with a higher credit score can make it easier to get approval, the interest rate on the loan will be determined by the lowest credit score on the application. So think carefully about who you want to buy a home with.
Source: Money.usnews.com