The Buddy Mortgage - What You Need To Know
February 14, 2020 | Posted by: Sherry Corbitt
The Buddy Mortgage – When does it make sense to purchase a home with a friend or family member?
In today’s hot real estate market, it can be hard to purchase your first home due to affordability and the mortgage stress test rules. Have you considered pooling resources with a friend or sibling and opening up more possibilities?
Purchasing a home takes thoughtful planning, a good savings, and an understand of what it means to co-own a property.
If you want to buy a home with a friend or family member there are things to consider to make sure it goes as smooth as possible.
First, ask yourself, what is the benefit of moving in together? For most “buddy” mortgages it is to be able to increase your purchasing power. With two incomes versus one you’d be able to afford a higher priced home with a more attractive down payment (especially if you both bring equal down payments to the table).
There can be other benefits as well. Perhaps, you enjoy the roommate experience. It’s also nice to have someone share the chores of home maintenance.
With all the benefits to doing a “buddy” mortgage, you need to also consider the person you want to partner with. As much as you may love this friend or family member, you need to make arrangements from the legal aspect of buying a home together. Treat this transaction as a business deal and it will make for an easier and more smooth journey together.
Step 1: Hire a lawyer
All homebuyers need to have a lawyer, and that’s especially true for families or friends buying together. Be prepared to spend more on legal services too. Why? There’s more to cover.
The following commitments and promises should be considered when preparing binding legal documents.
1) Be honest and disclose your financial situation. If you are going into business with a partner you need to understand the credit worthiness of that partner but remember, what is good for the goose…so make sure you are prepared to sit down and share your credit score and details with them too.
2) If you are applying for a mortgage together, work with a Mortgage Broker who knows to communicate with both of you on any issues that may arise. You don’t want to be kept out of the loop of a potential issue.
3) Be ready to commit to helping with the down payment, closing costs, and also have a clear understanding of what each of you needs to contribute monthly to the bills (i.e. mortgage, property taxes, etc).
4) It is highly recommended when doing a monthly budget of bills that you leave some cushion so that a ‘nest’ egg can accumulate for repairs, improvements, or issues that may come up.
Step Two: Imagine the Future
With a Buddy mortgage, it’s rare that this will be your last home. It’s really more of a way to get into the market now and become a homeowner. You have to consider and discuss what will happen when life happens: job loss, a new relationship, a baby, an illness, an out-of-town work promotion. Discuss what impact it could have on your housing arrangement.
For example, under what circumstances could the property be sold? For instance: What happens if not all co-owners want to sell at the same time?
Consider setting a minimum amount of time that everyone will commit. (Your mortgage term is a good place to start.) Then plan for what could happen after that.
For example, you may want to do some research around what financial options are available to you when one owner wishes to leave – such as buying out that owner’s share. Or, the empty unit could be rented to generate income that would pay back, over time, the owner who wanted to sell.
The solutions will be as unique as your situation. Talk it all through first and come to terms that make the most sense for you.
Step Three: Budget, Budget, Budget!
Nothing puts stress on a relationship more than money issues so decide how to cover emergency expenses, like a roof or furnace repair, and also how to decide on improvements like decks and painting.
One common solution we have seen is a joint bank account where each party puts in the equal amount for mortgage, property taxes, shared bills (heat, hydro, water, cable, etc) plus a rounded up amount. That extra money is now your cushion. We can’t stress enough to have this budget talk upfront and avoid issues later. With proper planning now you can avoid small grievances that can snowball into big resentments.
Step Four: Write it down
Now that you’ve done the hard work, put it in writing so that you do not have to leave it to memory to recall what was agreed too.
Being a homeowner is a dream for many people and by pooling resources with a friend or family member that dream could become a reality even sooner.
We’d be happy to help discuss in great details and are always here to answer any questions you may have.