Do you have either parents, family members or trustworthy close friends to pool resources and purchase a home together given the high cost of real estate and cost of financing?
Here’s what you need to consider when combining purchasing power and splitting carrying costs with either parents, friends, or other family members.
All of the potential co-owners should have a discussion about their finances and life goals as this will impact how the partnership plays out. Do all of the co-owners have stable incomes and a manageable amount of debt? Make sure everyone is dependable. Remember that with a joint mortgage, anyone who is on the mortgage is individually responsible for ensuring that the full mortgage amount is paid in full each month. In other words, even if you pay your share of the mortgage payment but the other owners do not, the obligation falls on all title holders which means it could fall back on you to maintain the full mortgage monthly payment.
How to co-own the property
There are two main popular ways to co-own a property: as joint tenants or tenants in common – both are described below. The agreement you choose will determine how the ownership is divided and what happens if one of the owners dies, wants to sell, etc.. Contact a real estate lawyer and also begin working with a mortgage broker.
The ownership of the property is divided equally between all the owners. If one of the owners dies, they are removed from the title of the property, and the property ownership remains equally divided among the other surviving owners.
Tenancy in common
Each owner can own a different size share of the property. Everyone has an equal right to use the property. In most cases, all parties must agree to sell the home. If sold, the proceeds will be divided based on the percentages which do not have to be equal. When purchasing the property, one person may have more saved for a down payment or want to make a bigger investment. Tenancy in common can allow you to divide the property into shares based on each owner’s contribution. Generally, a co-owner must get permission from the other owners to sell their share of the property. If one of the co-owners passes away, their share of the property can be left to any beneficiary they choose. However, the remaining tenants could end up sharing the home with someone they never intended to. Consider getting legal advice from a real estate lawyer.
There are other legal considerations, and a real estate lawyer can draw up an agreement so that the partnership expectations are clear. Top things to consider are:
- Who will have the rights to use the property?
- What if a party wants a partner or child or someone else to move in?
- Will owners be occupying a portion of the main home, or will some be in a separate secondary dwelling that exists on the lot?
- Who will be responsible for certain costs?
- What happens if one party loses their employment? Will the other party be forced to absorb the full costs of the property?
- What happens if one owner wants to sell or buy the other out?
- How will legal, real estate and other costs such as land transfer tax and property tax be divided when purchasing the home?
Other ways to co-own the property briefly discussed:
Ownership through a corporation
The home’s title would be held by the corporation, or a co-operative corporation created by the co-owners. Corporation ownership may make it easier for co-owners to sell or transfer their share without requiring the owners’ names on property title to change.
In homes that are divided into separate units, co-owners can also establish a condominium corporation where each co-owner owns their own unit and a share of common amenities.
A condominium is a form of ownership that may apply to smaller housing types such as units within a single house. Condominium owners may or may not be involved in the board of directors and but would be subject to the by-laws and rules of the condominium.
Each unit’s owner has the right to sell or transfer their unit to anyone they choose, and to obtain their own individual mortgage. There are several steps involved in creating a condominium corporation including a requirement for municipal planning approvals.
You’ve targeted a residential area to live. First, you need to figure out how much mortgage you qualify for together as well as what you can each afford to carry monthly. Since you’ll be applying for a joint mortgage, your mortgage qualification will be based on the total debt-to-income ratio including your combined income, credit scores, credit card debt, any existing mortgages and other loans.
You’ll also need to decide on a mortgage term that works best for everyone. A fixed-rate mortgage can provide you with more certainty about your monthly costs, while a variable rate mortgage may allow more flexibility if you decide to sell before the end of the mortgage term. Discuss your options with a mortgage broker
You may also want to talk to your co-owners about creditor insurance which a mortgage broker can provide. This can help you cover the mortgage loan in case one of you is unable to work due to a disability, involuntary job loss, critical illness, or in the event of a death.
Ongoing maintenance of the property
It requires time and money to maintain a property. A benefit of co-ownership is splitting the costs and work involved in keeping it up, from paying for insurance and utilities to fixing plumbing, electrical work, roofing, etc. Discuss upfront how you will divide the work and the bills. This can be included in a co-ownership agreement that you both sign.
One way to manage the costs together is by setting up a joint chequing account. All owners can contribute to the account on a monthly basis and you can use this fund to pay the bills. Contributing more than what’s required to cover the monthly costs will help you build a reserve fund for when bigger expenses come up, such as replacing windows, roofs, appliances, furnaces, etc.
If one of the homeowners suddenly can’t or won’t pay his or her share of the mortgage payment this will ultimately affect all parties and could result in damage to everyone’s credit score or even foreclosure. If you buy a house with several friends and one can’t pay their share, it falls on the other title holders. However, buying property with a trusted friend or family member who are stable financially can help you invest in real estate by combining your purchasing power and dividing the costs and maintenance. It’s important to discuss finances, plans and goals up front and consult a mortgage professional and real estate lawyer.