Exploring Co-Ownership: The Pros and Cons of Buying a House with a Friend in Canada
Within this blog post, we dive into the intricacies of joint homeownership, how lenders assess such arrangements, the distinctions between purchasing for shared living versus investment purposes, potential pitfalls to be vigilant about, and valuable tips to enhance your prospects of success.
Navigating the Logistics of Co-Purchasing a Home with a Friend
Before embarking on the journey of acquiring a property with a friend, certain critical prerequisites should be in place:
Candid Financial Discourse: Initiate an open conversation about your financial status and aspirations. This encompasses discussions regarding your initial deposit, monthly mortgage commitments, credit scores, and savings. Furthermore, it’s essential to outline long-term plans for the property and contingencies for scenarios where one party desires to sell while the other does not.
Secure a Co-Ownership Agreement: A legally binding document, this agreement outlines the rights and obligations of co-owners. It delineates how you’ll divide responsibilities such as the down payment, monthly mortgage installments, property taxes, insurance, and maintenance. Equally important is an exit strategy, detailing the process if one party wishes to sell the property.
Mortgage Pre-Approval: Obtaining pre-approval for a mortgage is a pivotal step. This not only provides insights into the amount you can borrow and your projected monthly mortgage outlays but also streamlines the home purchase procedure.
Considering Lenders’ Perspectives
Lenders adopt a prudent stance when dealing with co-ownership mortgage applications. They prioritize the financial stability and commitment of both borrowers. Factors like robust credit scores and a favorable debt-to-income ratio are instrumental in this regard. Additionally, lenders assess the strength of your relationship. This is vital because lenders want to ensure the long-term viability of the co-ownership arrangement. They seek to minimize potential conflicts or disputes that could impact their financial interests. For example, purchasing a property with a sibling you’ve known for years is generally seen as more stable compared to buying with someone you’ve recently met. This attention to your relationship and communication skills is crucial because if co-owners face disagreements or life changes that lead to a desire to part ways, it can result in a complex and intricate process, potentially affecting the lender’s ability to recover their investment efficiently. In later sections, we will explore the importance of a well-structured co-ownership agreement and prudent financial planning to navigate these complexities.
Deliberating Shared Living vs. Investment Ventures
Joint Homeownership: When buying a house with a friend for shared living, consider each other’s unique needs and preferences in the property selection process.
Investment Objective: If the goal is investment, assessing the property’s return on investment potential is crucial. A clear agreement on property management and the division of profits and losses is necessary. It’s important to precisely delineate and thoroughly consider risks related to cash flow, such as vacancies, and other potential income sources.
Several potential pitfalls must be acknowledged
Relationship Changes: Conflicts between co-owners can disrupt living arrangements.
Financial Instability: If one party faces financial challenges, it could hinder the other’s capacity to pay the mortgage or shared costs, especially if they partnered because one couldn’t qualify independently. This situation can create financial stress for both individuals.
Property disagreements: Both parties must agree on any repairs/renovations that would be done on the property. This can potentially lead to conflicts between the two owners.
Things to consider: Meeting a spouse, having kids, family friends, and pets are all things to consider when sharing a home and common areas in and on the property.
When issues emerge in a co-ownership arrangement, it’s important to recognize that resolving them is not as straightforward as selling the property or transferring the mortgage. If one co-owner decides they want to exit the agreement and sell the house, the consent of the other party is typically required. If a consensus is not reached and the remaining co-owner wishes to assume full ownership, they must qualify for the entire mortgage independently. This transition can be complex, as it necessitates the ability to support the entire mortgage on a single income. If the remaining co-owner cannot meet this requirement, it poses a challenging predicament.
Furthermore, should one co-owner stop making mortgage payments for any reason, the other co-owner is obligated to cover the costs. Failure to do so can result in adverse consequences for both parties, including a negative impact on their credit scores. These scenarios underscore the significance of thorough planning and a comprehensive co-ownership agreement that addresses potential contingencies, safeguarding the interests of all involved parties.
Real-Life Scenarios
Scenario 1
In the context of co-ownership, two common scenarios come into play when one party wishes to part ways. In the first scenario, one co-owner decides they no longer want to reside in the property due to personal reasons, like moving in with a significant other. In this case, they approach their co-owner and propose selling the property. If both parties agree, they proceed to sell the home, adhering to the terms established in their co-ownership agreement, and divide the profits accordingly.
Scenario 2
However, in the second scenario, the co-owner who wants to stay in the home is met with resistance from the other party, who is unwilling to sell. In this situation, the remaining co-owner may have the option to buy out the other applicant’s share. For instance, if the house is valued at $500,000 with a current mortgage balance of $200,000, the equity stands at $150,000 each. To buy out the co-owner, the remaining party would need to secure a new mortgage of $350,000, which encompasses the existing mortgage amount and the other owner’s equity share. It’s crucial to recognize that if the remaining co-owner cannot qualify for this mortgage independently, they may be unable to assume full ownership of the property.
This underscores the utmost importance of seeking independent legal advice before entering into a co-ownership agreement with another party to purchase a home. Such guidance can provide clarity on potential scenarios and the legal mechanisms to address them, ensuring both parties are well-prepared for any future contingencies. I recommend over and above legal independent advice to writing out in the agreement the plan for the exit strategy. That will at least help paint a picture of what it would look like if, buyout, cosigners needed, etc…
Our Role as a Mortgage Agent
As mortgage brokers, our role is pivotal in connecting clients with lenders while ensuring a suitable match for both parties. This responsibility extends to co-ownership scenarios, where compatibility between the co-buyers is crucial. When two individuals come together to purchase a home, it’s imperative to consider their relationship—whether they are friends, relatives, or other connections. We are tasked with facilitating a lending arrangement that not only aligns with the client’s financial profiles but also harmonizes with their co-ownership dynamics. This process underscores the importance of understanding the intricacies of the co-buyer relationship, allowing us to navigate the complexities and potential challenges associated with co-owning a property effectively.
If you find yourself uncertain about co-purchasing a home with a friend, consider living together as tenants for a year or two. This trial period allows you to assess the compatibility of your living arrangements.
Ultimately, weigh the potential risks and downsides carefully before committing. If you decide to proceed, ensure you have all necessary safeguards in place, such as a comprehensive co-ownership agreement, and pre-approval for your mortgage together, and draw up a realistic plan for an exit strategy.
