Co-Buying a House: Potential Pitfalls of Unequal Contributions
Co-buying a house with a friend, relative, or unmarried partner can make homeownership more affordable. Sharing the down payment, mortgage, utilities, and other household expenses can lower each buyer’s costs while allowing everyone to build equity.
However, buying a home together can also create financial and estate planning problems. Those risks become especially important when the buyers contribute different amounts toward the down payment, mortgage, repairs, or other expenses.
Before purchasing a home with another person, the co-owners should decide how ownership will be divided, how the property will be titled, and what will happen if an owner dies, stops paying, wants to sell, or can no longer live in the home.
What Are the Risks of Co-Buying a House?
A home is the largest single investment most people make. When two or more people buy a house together, each person’s financial circumstances can affect the others.
Potential problems include:
- One buyer’s credit affecting the mortgage terms
- One owner failing to pay their share of the mortgage
- Disagreements about repairs and improvements
- Unequal contributions that are not reflected in the deed
- One owner wanting to sell while the others do not
- A co-owner becoming incapacitated
- Creditor, divorce, or bankruptcy issues
- Disagreements over who inherits an owner’s share
- A surviving owner unexpectedly sharing the property with the deceased owner’s heirs
Some co-buyers plan to live in the property together. Others may intend to rent the home or renovate and sell it for a profit. Whatever the goal, the ownership structure should match the buyers’ financial arrangement and estate planning wishes.
What Is the Difference Between a Mortgage and a Deed?
The mortgage and the deed serve different purposes.
The mortgage or loan documents determine who is responsible for repaying the lender. The deed determines who legally owns the property and how that ownership is held.
A person can be obligated on a mortgage without receiving the same ownership interest as another buyer. A person may also be named on the deed even if they contributed little or nothing toward the purchase.
Co-buyers should not assume that making unequal payments will automatically create unequal ownership shares. The deed, purchase documents, and any co-ownership agreement should clearly reflect what the buyers intend.
How Can Co-Owners Hold Title to a House?
Property can be titled in different ways. Common forms of joint ownership include:
- Tenancy in common
- Joint tenancy with right of survivorship
- Tenancy by the entirety
Each option affects the owners’ rights during life and what happens to the property after one owner dies. The exact rules depend on the law of the state where the property is located.
Tenancy in Common
With a tenancy in common, the owners may hold equal or unequal shares of the property.
For example, two buyers could each own 50 percent, or one buyer could own 70 percent while the other owns 30 percent. Each owner generally has the right to use and possess the entire property despite the percentage of their ownership interest.
A tenant in common may choose who will receive their share when they die. The interest does not automatically pass to the other owner.
The owner’s share may pass under a will or trust. If the owner does not have an estate plan, the interest generally passes under the state’s intestacy laws.
Joint Tenancy With Right of Survivorship
Joint tenants hold undivided interests in the property with a right of survivorship.
When one joint tenant dies, that person’s interest generally passes automatically to the surviving joint owner or owners. The deceased owner cannot use a will to leave that interest to someone else.
Joint tenancy can simplify the transfer of ownership after death, but it also limits each owner’s ability to control who ultimately inherits their share.
The Maryland People’s Law Library provides additional information about joint ownership of real property.
Tenancy by the Entirety
Tenancy by the entirety is a form of ownership generally available only to married couples.
Like joint tenancy, it includes a right of survivorship. When one spouse dies, the surviving spouse generally becomes the sole owner.
Tenancy by the entirety may also offer valuable creditor protection. In Maryland, property held this way generally cannot be used to satisfy the separate debt of only one spouse, although it may be subject to claims owed by both spouses.
The protection and requirements vary by state. Married co-buyers should verify how tenancy by the entirety operates where the property is located.
How Do Unequal Contributions Affect Ownership?
Unequal contributions can create problems when the deed does not clearly reflect the buyers’ agreement.
For example, one buyer may provide most of the down payment while the deed gives both buyers equal ownership. Another owner may initially contribute less but agree to pay a larger share of the mortgage or renovation expenses.
Without a written agreement, the co-owners may later disagree about:
- Their ownership percentages
- Whether a larger contribution was a gift or loan
- How sale proceeds should be divided
- Whether mortgage payments increase an owner’s equity
- How repair and improvement costs should be treated
- Who should receive credit for taxes, insurance, or maintenance
- What happens if one owner stops contributing
The deed alone may not answer all of these questions. Co-buyers should decide how unequal payments will be treated before the purchase is completed.
What Happens If One Co-Owner Cannot Pay?
If all co-buyers signed the mortgage, the lender may be able to hold each borrower responsible according to the loan terms.
A private agreement stating that each owner will pay a certain percentage does not necessarily limit the lender’s rights. If one borrower fails to contribute, the others may need to cover the shortfall to prevent late fees, foreclosure, or damage to their credit.
The co-owners should decide in advance:
- How mortgage payments will be divided
- What happens after a missed payment
- Whether another owner’s payment creates a debt or increases equity
- How long a defaulting owner has to correct the problem
- Whether the other owners may buy out that person’s share
Putting these terms in writing can reduce uncertainty and provide a process for handling a financial problem.
What Happens If One Co-Owner Wants to Sell?
One owner may want to sell because of a job change, relationship breakdown, financial hardship, or a desire to access their equity. The other owners may want to remain in the home.
Before buying, the co-owners should agree on:
- Whether one owner can force a sale
- Whether the other owners have a right to purchase that person’s share
- How the property will be valued
- How much time the remaining owners have to arrange financing
- How sale costs and proceeds will be divided
- How disputes will be resolved
Without an agreement, the owners may need to rely on state property law or a court proceeding to resolve the dispute.
How Does Co-Ownership Affect Estate Planning?
Co-buying a house creates immediate estate planning consequences.
For most people, a home is their greatest investment and a primary source of household wealth. Even a partial ownership interest may be worth more than the person’s other accounts and property.
Each owner should understand how the property is titled and make sure the title matches their estate planning wishes.
What Happens to a Tenant in Common’s Share?
A tenant in common can generally leave their ownership interest to a person or trust of their choice.
However, that choice must be reflected in an estate plan. Without a valid will, trust, or other applicable transfer arrangement, the share may pass under state intestacy law.
The surviving co-owner could then find themselves sharing the property with the deceased owner’s spouse, children, or other heirs.
What Happens to a Joint Tenant’s Share?
With joint tenancy and a right of survivorship, the deceased owner’s share generally passes directly to the surviving joint owner or owners.
That transfer usually occurs outside the deceased owner’s will. Even if the will names someone else, the survivorship provision on the deed generally controls the property’s transfer.
This may be exactly what a married couple or committed partner wants. However, it may be a poor choice for friends or relatives if each owner wants their share to pass to different beneficiaries.
What Happens to Property Owned by Married Couples?
Married couples may choose joint tenancy with right of survivorship or tenancy by the entirety.
Tenancy by the entirety may provide additional creditor protection, but the couple should still consider how the property fits into their complete estate plan. The surviving spouse will generally become the sole owner, but the plan must also address what happens after the surviving spouse dies.
Should Co-Buyers Have a Written Agreement?
A written co-ownership agreement can address issues that the deed and mortgage do not fully resolve.
The agreement may explain:
- Each owner’s initial contribution
- Each person’s ownership percentage
- Responsibility for mortgage payments
- Payment of taxes, insurance, utilities, and repairs
- Treatment of improvements
- Rules for renting the property
- What happens after a financial default
- Buyout rights
- How the property will be valued
- What happens if an owner dies or becomes incapacitated
- When the home must be sold
- How disputes will be handled
The agreement, deed, mortgage, and each owner’s estate plan should work together. Conflicting documents can create additional problems rather than solve them.
When Should You Review the Title to an Existing Home?
How a home is titled remains important even after the purchase is complete.
Relationships, finances, family circumstances, and estate planning priorities change. The original deed may no longer reflect what the owners want.
Current owners should review the title when:
- A co-owner marries or divorces
- An owner makes a substantially larger financial contribution
- Someone moves into or out of the home
- A co-owner wants a different beneficiary to inherit
- An owner develops health or capacity concerns
- The property is refinanced
- The owners create or revise wills or trusts
Changing a deed may have mortgage, tax, creditor, and estate planning consequences. Do not add or remove an owner without understanding those effects.
How Can an Estate Planning Attorney Help Co-Buyers?
Choosing how to title a home depends on the buyers, the property, their financial contributions, their estate planning goals, and the law where the property is located.
At McDonald Law Firm, we can explain the advantages and consequences of each form of joint ownership. We can also help ensure that the title and each owner’s estate plan work together.
Call Andre O. McDonald, a Howard County, Montgomery County, and District of Columbia estate planning, special needs planning, and Medicaid planning attorney, at 443-741-1088, 301-941-7809, or 202-640-2133 for help getting your estate planning house in order.
DISCLAIMER: THE INFORMATION POSTED ON THIS BLOG IS INTENDED FOR EDUCATIONAL PURPOSES ONLY AND IS NOT INTENDED TO CONVEY LEGAL, INSURANCE, OR TAX ADVICE.
