With U.S. home prices having jumped 20 percent in the past year, it is becoming increasingly harder for many Americans to buy a home on their own. To be able to break into the housing market, more and more buyers are going in together with siblings or parents on the cost of a property. And many people are choosing to split the cost of a mortgage with their elderly parents so they can care for them as they age. If affordability conditions continue to be a struggle, joint family home loans may be a permanent trend.
When family members buy a home together, they all become co-signers on the mortgage. They can all live together in the same house, but in many cases, it is not required. That means your parents, grandparents, aunts or uncles, or siblings could help you buy a home as a gift to you, or they could help you out as a form of investment for themselves. Whatever the motive, you will all have to qualify for the mortgage, and you will all be liable for making the payments.
Buying a home with relatives can make the financial burden much lighter. For example, all parties can contribute part of the down payment, making it easier to get to that magic 20%. Or one borrower (perhaps, the parents) can contribute the entire down payment, making homeownership attainable for a buyer who otherwise couldn’t afford it. Plus, all the buyers can split the monthly payment.
And to qualify for the mortgage, all borrowers’ income and assets are considered, giving you a much stronger application than you might have had alone, especially if there are multiple incomes among the buyers. You’ll likely be approved to buy a more expensive property than you would on your own as well.
There can be some drawbacks to sharing a mortgage though. For starters, all co-borrowers credit scores will be counted in the application process, with the lowest score being used for approval. So if your co-buyers score is lower than yours, you may have to pay a higher interest rate or deal with other less favorable loan terms. All buyers’ debt-to-income ratios are also factored in, meaning you will have to disclose all your debts to your family members, and they’ll have to do the same with you.
Plus, both (or all) of you are fully responsible for the repayment. So, if someone stops paying their portion of the mortgage, you will have to come up with the extra money or you all risk losing the house. And even if you make your part of the payment, your credit score will be dinged if your co-buyer is late or misses their share for the month.
It can be more difficult to sell or refinance a shared mortgage, as all parties have to agree before any action can be taken.
The best thing to do before buying a home with family members is to draw up a legal contract. This should specify how much of the monthly mortgage payment each co-borrower is agreeing to pay and who will be responsible for paying the taxes and insurance. The document should also layout how utilities are to be paid as well as who will take care of and pay for the home maintenance. Making this document legally binding will help prevent future disputes and difficulties.
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