Can I Buy a House with My Friend? How Mortgages Work Without a Spouse

About 38% of homebuyers are now millennials, making them the largest group of homebuyers. As more millennials opt to leave the rental market and own their own home, an interesting trend emerges. 

Unlike their parents and grandparents, millennials are the least likely generation to get married. Not only are they waiting longer to get married - but many of them never will. In fact, recent data from Pew Research indicates that  25% of millennials will likely never get married. 

This trend is out of line with the perception that homeowners are typically married couples. Today, many single millennials are buying homes by themselves - and many others are opting to co-own with their significant other, a family member, or a friend. 

So what do you need to know? 

Can you buy a home with your boyfriend / girlfriend / etc.?

There are no laws against buying a home with someone other than a spouse. You can buy a home with anyone, whether that’s your mother, boyfriend, best friend, or cousin. In many cases, this may be a practical financial decision if you can’t afford the mortgage on your own - or want a nicer place than what you could afford on your own. 

“A great advantage of applying for a mortgage with someone is that it helps you get involved in real estate sooner than if you were to do it by yourself.  Real estate is a great long-term investment historically, and being able to split the costs with someone can be a great way to defray the upfront costs,” explains Mortgage Advisor Andrew Leonardis.

Buying a house with a friend

How does it work? It's actually not that different from applying with a spouse:

“If you have multiple unmarried people [you can have up to 4!] applying for a loan, the process isn't all that different than if 2 of the borrowers were married,” explains Leonardis. “There are some differences from our point of view as a lender, but the numbers are largely the same. We will still consider the debts, income, and credit of all the people applying for the loan. 

Many people aren't aware you can apply for a mortgage with a friend. I think it can be a great option, especially as real estate in many markets becomes even more expensive. The upfront costs are many people's biggest barrier to entry, and this represents a way you can stop paying rent!”

And even for couples who do plan on getting married, moving in together - and buying a house together - may come first:

• According to Mass Mutual’s blog, an estimated 9% of homebuyers in 2019 were unmarried couples.
• The average cost of a wedding in America is now $33,931. Many couples - cognizant of how nuptials will impact their savings - are opting for home investment first, and wedding bells later.

How to manage a mortgage when you’re not married

There are several ways to go about applying for a mortgage when you’re not married. Oftentimes, it makes sense for the individual with the higher credit score to apply for the mortgage. A higher credit score will correspond to better rates from lenders, ultimately saving both partners money over the length of the loan. 

Of course, you may want to apply together so that you can qualify for a larger mortgage. However - and this is important - the lender will typically base your rate on the lower score. They will not average the scores together to determine your rate.

Does applying for a loan mean the debt is all yours?

It’s possible for one partner to be on the loan, while both partners are on the title. However, the partner applying for the loan should be aware that this puts the risk in their court. If the title-only partner stops paying toward the mortgage - for whatever reason - the mortgage-and-title partner is still legally responsible for paying 100% of the loan. And even if they pay for 100% of the loan, the ownership of the home will still be split - as per the title. 

Can you buy a house without your spouse?

Even when you are married, you can opt to buy a home without your spouse. Keep in mind, though, that some states (nine in total) consider homes to be community property - so in these states, both spouses will own the home even if they’re not on the mortgage.

You may want to buy a house without your spouse because one of you has a poor credit score: keep in mind that FHA and VA loans will consider both spouses’ debt for determining loan eligibility anyway.

What happens if we break up or someone moves?

It’s worth noting that unmarried individuals have fewer property protections under the law than married couples do. Whether it’s your fiance or your old college buddy splitting the mortgage, unexpected things can happen - someone gets a job in another city, breakups occur, or losing a job may mean an inability to keep paying the bills. They may need to move out - or you do.

If one party decides to move out, any party that owns part of the house (even if it’s a minority ownership, like 30%) can force a sale. If one partner wants to keep the house rather than collecting money from the home’s sale, they would be legally obligated to buy out the other party’s ownership. At that point, the home may also need to be refinanced (in order to get the mortgage in one person’s name). 

Your best bet is to have a clear legal process in place - and on paper - before anything happens, so that you’re not trying to deal with financial and legal issues while potentially handling emotional ones at the same time. 

How does co-owning a home after divorce work?

After a divorce, it’s not uncommon for spouses to decide to continue co-owning a home - especially if there are kids involved. If they can afford to, one spouse could buy the other one out. If that’s not possible - or desired - then both individuals will need to be diligent about making sure mortgage payments are taken care of. 

A home is a significant debt and if both people are on the mortgage, then either one can be penalized if the other spouse is late with a mortgage payment. And if both spouses stay on the mortgage, a credit report for either person will show the entire amount - making it more difficult to get credit in the future (for another house, a credit card, or a car, etc). You will also need to decide which spouse gets the mortgage deduction on their taxes. Finally: if one spouse runs into financial trouble, such as high medical bills, or bankruptcy, be aware that the home can be used as collateral to settle the debt.

Ultimately, even in the best of worlds, there is a fair amount of financial risk involved with co-owning a home after divorce. 

How to legally structure your home purchase

If you’re not going to have built-in spousal legal protections under the law, what you’ll want is a Cohabitation Property Agreement. The best way to get this is through an attorney, such as a family law attorney - so that you can make sure the agreement is legally binding and covers all bases. 

Here’s what a Cohabitation Property Agreement should include (but is not limited to):

• Type of ownership on the deed (joint tenancy with rights of survivorship or tenants in common)
• Percentage of the house each party owns
• Payment responsibility
• Buyout agreement
• What happens if there’s a job transfer
• If one partner needs to move out, how long they have to do so
• What happens to personal property if you accumulate it while living together
• Dispute process
• Exit strategy

Other provisions the document could include, depending on your situation:

• Who pays utilities, insurance, etc.
• Whether disputes require mediation before court
• What to do with co-owned pets

A Joint tenancy

You may have heard about joint tenancy. In a joint tenancy, two or more people own property together. This can be friends, married couples, non-married couples, relatives, etc. 

A joint tenancy is a legal relationship that allows interest in the property to transfer onto the remaining properties (without a joint tenancy, interest could go through probate/to an estate). In a joint tenancy, everyone is entitled to a share of the benefits (so if you rent out the home, each person gets an equal share). However, while everyone is equally responsible for payments such as property taxes and the mortgage - if one person fails to pay, the others must step up (or risk foreclosure). Since everyone has joint interest, the property can’t be sold without everyone’s consent. 

• The main advantage of joint tenancy is that if one owner dies, property reverts to the other owner(s) rather than probate

Buying a house from a friend

If you're buying a house from a friend (or family member, acquaintance, etc), rather than with a friend, your number one goal should be to establish a legal, legitimate transaction. At a minimum, you should hire an attorney or a Realtor to oversee your purchase and make sure you've documented it correctly.

It's easy to cut corners when it's someone you know - after all, your best friend would never try to take the house back! However, it's worth considering that a home is such an important, monumental investment that all possible steps should be taken to establish true legal ownership. And unfortunately, bad things can happen - if your best friend has to declare bankruptcy and the home wasn't properly signed over to you, then the bank can come for your (technically their) home.

When you buy a home from someone you know, you may find that there are additional restrictions in place (depending on your lender, etc) to prevent fraud. If a family member sells their home to you and you're using an FHA loan, for example, you'll be required to put a minimum of 15% down instead of the usual 3.5%.

For further reading

• How Much to Put Down on a House: the Problems with 20%
• FHA FAQ: Everything You Need to Know for 2021
• Do Student Loans Affect Buying a House? What Millennials Should Know