Should I buy a house with my best friend?
By Eva Norlyk Smith Ph.D.
September 8, 2014
My best friend and I are thinking about buying the house we live in and renting out the other two bedrooms. We figure we could recoup at least some of the mortgage that way. Could the fact that we aren't related affect things such as the interest rate, terms or even whether we can get a loan? We just want to be prepared. –Suzanne
I hate to say this, but I'd be far more concerned about the impact that owning a house together will have on your friendship than about interest rates and mortgage terms. On the surface, buying a house together may seem to be a great way to save money on rent and get some additional income. But, you could easily open up a Pandora's Box as far as your finances, credit rating and your relationship are concerned.
First, owning a house is a long-term commitment, and it is fraught with unexpected challenges. The minimum length of time a mortgage is paid off is typically 15 years (although, or course, you can pay it off sooner), and a lot can happen in 15 years! One of you may meet a life partner, get a job in a different town or decide you want to live in a different place. Equally possible, as often happens, you may grow apart and no longer get along as well as you do now. Life is unpredictable, and you just don't know what can come up.
In addition to the unpredictability of life, there are the very predictable issues you will run into owning a house together. Houses require maintenance, but people have different standards about what needs to be repaired and when. Unexpected expenses come up that you may not have the money for, which can be a test for any relationship. One of you may spend more time taking care of the house or dealing with renters, and that could cause resentment. Or, you may feel your friend is handling the house or renters incorrectly. Also, you may disagree about who should live in your house.
And I've saved for last the most important reason for not going through with this idea: Co-signing a loan with a friend is a really, really bad idea, no matter the type of loan. Once your name is on a loan, you are responsible for the whole amount of the loan — not the half you might think you signed for. This means that if your friend decides to move and stops paying her share of the mortgage, you will be on the hook for paying off the full mortgage amount. While in theory she is responsible for her half, in reality, getting her to pay up could be a long and expensive process. Even if you do end up getting a judgment against her, if she isn't working and has no assets, you still would not be able to get the money to cover her share of the loan. Also, if you decide to move, you will still be responsible for your share of the mortgage. And if you default on the loan, it will hurt your credit score for years to come.
Can't you just sell the house if things no longer work out, you ask? It depends. In the best case scenario, yes. But here, too, are many potential problems. The price you can sell it for after Realtors' commissions may be lower than what you paid. Or more rarely, the market may take a dive, causing the price you can get for the house to be lower than the money owed on the mortgage. Bottom line: You could end up being stuck with a house you can't sell.
Sorry to paint such a bleak outlook, but finances have a strange way of complicating relationships. For married couples who have dedicated their lives to being together, the issues surrounding owning a house together can be difficult enough to negotiate. And for married couples, at least there are set standards and laws for how joint affairs are handled if a couple decides to split up. Not so with friendships. If problems arise, you could be left holding the bag.
So this is one area where what may seem like a great idea in the short run, could easily turn into a bad idea in the long run. Yes, you may save some money on rent and earn some welcome extra income. But odds are high that the whole venture could end up being so costly to you emotionally, mentally and financially that you will find those savings far too expensive overall. Good friends are hard to come by and hard to keep. That's an inestimable value that you don't want to risk just to earn a little extra money.
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