Define Participation

The first area where co-buyers need to align relates to participation. At a basic level, we need to answer:

→ Who will be involved?

→ Who will live at the property?

→ How will each party be involved?

→ What will each party contribute?

→ What are each party's circumstances?

Participation Types

Every situation is different, but it's important to establish clarity about what role each party plays, as there are tax, mortgage, and legal implications.

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Occupancy Status

Co-buyers need to determine who will occupy the home.

Generally speaking, an individual's occupancy status reflects whether or not the property serves as their primary place of residence.

Two of the main arenas where occupancy status counts are taxes and mortgage lending.

For tax purposes, the IRS says:

"If you own and live in just one home, then that property is your main home. If you own or live in more than one home, then you must apply a "facts and circumstances" test to determine which property is your main home. While the most important factor is where you spend the most time, other factors are relevant as well."

For mortgage lending, a property may qualify as a primary residence if at least one of the co-owners listed on the mortgage as a co-borrower is an occupant of the home.

ℹ️ Fast Fact

While 67% of US co-owners say at least one member of their group lives at the co-owned property, occupancy of a co-owned home can include all, some, or none of the co-owners.

Participation on Title (asset side)

Co-buyers need to decide who will hold Title.

Being on the Title means you have legal ownership of the property. This is a significant commitment that comes with both rights and responsibilities. As a title holder, you have a say in the property's future, from renovations to resale. However, you're also directly or indirectly financially responsible for the mortgage, taxes, and any legal obligations that come with property ownership. Understanding the implications of being on the Title is crucial for long-term success in your co-buying venture.

🔎 Real-World Example

The second CoBuy group we worked with to navigate co-buying back in 2017 counted ten lovely participants. The group is an intentional community. Ten is a difficult number any way you cut it, but ten co-borrowers won't qualify for traditional residential mortgage financing—full stop.

It turned out that just three folks in the group would be on the mortgage as co-borrowers and co-owners listed on Title to the property. Practically speaking, the others were renters. The group considered themselves an extended family. The legal and lending frameworks see things differently. Case in point: details matter.

Participation on the Mortgage (liability side)

Co-buyers need to agree on who will participate on the mortgage.

Securing a mortgage is often a necessary step in the purchase process. It's a significant commitment. Being on the mortgage means you're legally responsible for repaying the loan. Failure to make timely payments can have severe financial consequences and affect your credit score.

📖 Important Note

A co-borrower is an individual who takes on equal responsibility for repaying a mortgage used to finance the purchase of a home. In co-buying scenarios, co-borrowers are usually friends, family members, or partners who jointly purchase a property.

Each co-borrower's income, creditworthiness, and debt-to-income ratio are considered by the lender, which can improve the chances of loan approval or secure more favorable loan terms. It's important to note that all co-borrowers are joint and severally liable. That means that if one party fails to make payments, the others are still responsible for covering the debt.

It's crucial to understand your obligations and to ensure that you and your co-buyers are financially prepared for this commitment. Whether you're a primary borrower or a co-borrower, your liability is a critical aspect of the co-buying arrangement.

🗒️ Field Note

Over 96% of the co-buyers we’ve worked with since 2016 have financed their home purchase with a mortgage.

⚠️ Asset-liability Mismatch Risk

Be mindful of the potential for an asset-liability mismatch, which arises when one or more co-owners have unequal stakes in the property's assets and liabilities.

Example: an individual who has mortgage liability without corresponding equity in the home has uncovered exposure. A mismatch like this can be created through a lack of planning or develop as a result of an expected risk event. Any unbalanced risk-reward scenario can lead to financial strain and interpersonal conflict.

Individual Contributions

All participants need to agree on what each individual will bring to the table in terms of financial contributions and non-financial contributions.

‍Financial contribution include:

1. Cash up front to cover down payment, closing costs, and other purchase-related expenses
2. Ongoing cash payments towards recurring expenses, periodic expenses, and emergency or unexpected expenses.

Not all contributions are strictly financial. Many co-buyers agree to invest skills, labor, or time as a non-financial contribution to the co-ownership arrangement. It can be more challenging to ascribe an objective dollar value to this kind of contribution. So, it's important to discuss, agree, and factor these contributions in before the fact to avoid disagreements and confrontation.

Personal Circumstances

Taking stock of each co-buyer's unique situation is an essential part of the planning stage. These individual factors can significantly impact your group's eligibility for mortgage financing and may also influence the co-ownership arrangement.‍

Key Factors to Consider

👉 First-Time Buyer Status: Over 90% of CoBuy groups we've worked with include at least one first-time buyer. This status can have lending implications, such as eligibility for specific loan programs or down payment assistance.‍

👉 Credit Score: A co-buyer's credit score can affect the mortgage interest rate and may determine whether the group qualifies for a mortgage.‍

👉 Employment Status and Income: Stable employment and a consistent income stream are generally favorable in the eyes of lenders. Variability in employment status or income among co-buyers can complicate the mortgage approval.

👉 Debt-to-Income Ratio (DTI): Lenders look at the ratio of your monthly debt payments to your gross monthly income. A high DTI can be a red flag and require additional financial scrutiny.

👉 Absence of Mitigating Factors: Any personal credit events, past foreclosures, pending legal issues, and other mitigating factors can affect your mortgage application. Disclose these up front.