Joining forces with friends, family members or a romantic partner to buy a home carries risks and benefits for all parties involved. Ben McKillop, branch manager at Mortgage Network, sees obvious advantages to people jointly buying a home. For investment properties, it’s all about the debt-to-income ratio.
“It strengthens their purchasing power,” McKillop said. “Because of the debt-to-income ratio in order to qualify for a higher loan amount or higher purchase price a lot of times you need multiple people in order to make that income work.”
McKillop sees people teaming up to buy primary residence homes most frequently in Boston, where the cost of buying a $500,000 condo can be prohibitively high for first-time homebuyers. Parents often join with recent medical school graduates to help them make a purchase that will put them near the city’s hospitals.
He cautioned that choosing the right partner is the key to avoiding pitfalls, but there are always risks. Situations become convoluted if both partners are not on the same page.
“Some of the unforeseen circumstances end up being one person runs into some sort of financial issues where they are forced to sell or they need to tap that equity and the other partner might not want to,” McKillop said. “Then it becomes a situation of whether one can buy out the other. Well, do they qualify?”
A partner who is financially stronger than the other may be able to qualify on their own and a buyout can be arranged. At that point, the mortgage is refinanced into that partner’s name as a “cash out refinance” so that the other partner can be paid the agreed-upon amount.
In McKillop’s experience, the most common way to dissolve such partnerships is for one party to buy the other out, if they qualify for financing, or for both parties to sell the home and split the proceeds. In situations in which parents help their children buy homes, the decision to dissolve the partnership often comes when the recent graduates start earning more.
“The parent co-signs and then what we see is all of a sudden one of them may get promoted to be the head of the ER, their salary jumps 300 grand a year,” McKillop says. “What what they typically do is call us and say, ‘look, I want to refinance and let my dad off so I can free him to do what he needs to do.”