Latest posts by Matt Holmes (see all)
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So you think you might want to co-buy?
Here’s what you’ll need:
- One or more co-buyers (by definition)
- Cash: collectively you will need a minimum of ~5% of the target property value in cash
- Ability to repay: just what it says on the tin: employment providing a steady income so that you can cover your mortgage payments
You’re not riding solo
First things first: if you’re looking to co-buy then you’re going to need one or more friends or family to CoBuy with. We’ll cover what makes a good CoBuyer in the next post, but suffice it to say that anyone you are likely to co-buy with is from the inner rungs of your social circle. You may have lived together previously, or you may even be currently renting together. Or perhaps Granny is helping you buy your first place, and instead of paying the federal gift tax on every dollar over $14k she gives you (that’s right – Grannie giveth, Uncle Sam taketh away!), Granny decides to go halfsies with you*. Or maybe you’re buying with your significant other as an unmarried couple. Regardless, deciding to live with someone is a big commitment. Deciding to jointly own an asset worth hundreds of thousands of dollars is an even bigger commitment. Choose wisely.
You’ve got to pay to play
Next, you and your fellow co-buyer(s) will need sufficient funds to cover fixed costs. Fixed costs include down payment + closing costs + moving costs. Collectively you’ll need to come up with at least 3.5% of the target property value as a down payment in order to qualify for a mortgage. Closing costs vary, but often range from 1-3% of the target property value. You’ll need this in cash and the lender will verify the source. A last minute gift from abroad probably won’t pass muster. It’s a good idea for co-buyers to have an honest discussion about what the parties to the purchase are bringing to the table before getting too far down the line.
You’ve got to qualify
As you’ll have guessed, your group will need to jointly qualify for financing. There are many, many factors that enter in to play and the bottom line is no online calculator can give you a definitive answer here. You’ll need to speak to a mortgage banker or broker. Generally speaking your group will need to have a cumulative debt-to-income ratio of less than 43%, the ‘ability to repay’ the mortgage, and individual credit scores of 580+ (for an FHA loan). Student loans won’t necessarily preclude you from qualifying, so long as your debt-to-income ratio stays within the limit. In addition to these and other factors, a lender will look at individual employment histories and whether your or your co-buyer(s) have any credit events (bankruptcies, defaults, etc.).
Let’s sum it up
If you’re thinking about buying a place with one or more co-buyers, the key requirements are fairly simple. You will need enough cash to cover fixed costs, and you’ll need to individually and jointly meet lending requirements. Steady employment and a clean bill of financial health (eg no recent bankruptcies) are important. With lending requirements in constant flux and many new programs and incentives being introduced by federal, state, and local governments, it’s a good idea to speak to a qualified lender who has experience with jointly-financed home purchases about your options: we can help. To find out more, visit our site at gocobuy.com.
A note about online mortgage affordability calculators
To be blunt, these shouldn’t be relied on as gospel. Why? Because what you can ‘afford’ to service each month is different from what you can qualify to borrow. Don’t see the “co-buy” option on that calc? There isn’t one, and for good reason – there are just too many moving parts. Forming budget expectations based on the output of these tools is like to attempting to use a Super Nintendo controller to drive your car (good luck). What you and your co-buyer(s) can qualify to borrow depends on many variables that are not reflected in any online calculator. Your best bet is decide who you’re co-buying with, determine how much cash you can each contribute, and to engage a qualified lender who has experience with lending to joint purchasers.
*If in doubt, check with a CPA.