5 steps to buying a home with friends

Buying a home is a big financial commitment - if things go wrong, you could risk your friendship as well as your home. You and your potential co-buyer (or buyers) need to be clear about how much you can each contribute financially, your preferred living arrangements, and how you might deal with problems that arise.

You'll also want to decide if you'll be true co-owners or if one person will be the owner and mortgage-holder while the others will simply be tenants. It's crucial to define each person's role before you buy.

Each person's income, debt and spending habits will affect their ability to contribute to a down payment and pay their share of the ongoing costs. If one person has credit issues, it could be more difficult to qualify for a mortgage together. Be honest with each other, and be sure to get preapproved^Footnote2 for a mortgage before looking for a house, so you know how much you can afford together.

Keep in mind that if one of you can't or won't keep up their contribution to the mortgage, the others will need to make up the difference to avoid damaging everyone's credit.

There are several ways to title a property, with pros and cons to each. These are the basic options:

• Sole ownership: One person has all rights and responsibilities. In this case, while friends may contribute to costs and live in the house, they would be tenants, not co-owners.
• Joint tenancy: Each co-buyer owns an equal part of the property, and if one person dies, the other surviving co-owners receive the deceased's share. However, co-owners can sell their share without the permission of the other owners.
• Tenancy in common: The co-buyers own unequal shares (usually based on how much each one invests). Each person can bequeath their share to whomever they choose, but all co-owners must agree if one wants to sell their share.

You'll also need to agree on certain fundamentals, such as preparing for 'what-ifs' and including them in your co-ownership agreement. Be sure to plan out things like:

• How you'll split ongoing costs. Fifty-fifty? Based on income? What about unexpected expenses?
• Who owns what. You'll acquire things over time. Who gets them if you don't stay together?
• What happens if someone needs or wants to move. Couples break up. Employees get transferred. If you need your equity from the home (or, conversely, if you can't afford to buy out your ex-partner or assume the mortgage alone), there will be a plan in place.

Traditionally, the home buying process has been geared toward individuals or married couples. Since there are different legal and financial issues for friends who are buying together, it's helpful to choose real estate and mortgage professionals who understand your particular needs.^Footnote3

Once you've decided on a plan, it's a good idea for everyone involved to consult your lawyers and have them draw up a co-ownership agreement. Having your plan in writing gives you a clear framework for dealing with whatever may happen over time and helps ensure a successful co-owning experience.