Since the beginning of the housing recovery in 2012, home prices have raced ahead at a pace far stronger than income gains.
That imbalance is causing more homebuyers to look for a helping hand.
Attom Data Solutions reports that on average, nearly 1 in 4 mortgages in the second quarter involved co-borrowers who were not spouses, compared with less than 1 in 5 as recently as 2015.
In many major markets, co-borrowing was even more popular.
More than 50 percent of mortgages in San Jose, California, which includes Silicon Valley, involved co-borrowers in the second quarter. In Miami, 45 percent of mortgages had co-borrowers, Seattle had 39 percent, in Portland, Oregon, nearly 30 percent of mortgages had co-borrowers and in Tampa, Florida, 26 percent.
"The market has to react to higher prices in some way," said Daren Blomquist, senior vice president at Attom Data Solutions. "During the last housing boom, the decision was to loosen lending standards. That's not happening now, so co-borrowing is one solution."
Co-borrowers can be the bank of Mom and Dad co-signing to help a child qualify for a mortgage. Or it can be two (or more) unrelated people going in together on a home. Third-party investors are another option; Unison.com, available in a dozen states and the District of Columbia, provides down payment assistance in return for a share of any gains when you sell (or buy 'em out); the typical equity share is 35 percent.
While all permutations of getting help can be a viable way to cope with today's affordability crunch, "you need to go in with eyes wide open," Blomquist said. "Think through the worse-case scenarios."
The co-borrower 'prenup'
Hopefully the worse-case never comes into play, but talking through all the what ifs is a valuable process to make sure you are on the same page and have anticipated all the major issues.
- Get down to business. Even if you're related or BFFs (today) this is a huge financial agreement that begs for a formal operating agreement that you both put in writing. Nolo.com has sample contracts for shared-equity agreements.
Key issues to settle before you go dutch:
- If you intend to have something other than a 50-50 split of gains (or losses) when you sell, put it in writing.
- How will you split maintenance costs?
- What about renovations? If one party pays for an upgrade, how much of that cost will be repaid from any future profits when you sell?
- Do you agree on when (and when not) to tap equity?
- Take care on the title. If you intend for your co-borrower to inherit your stake in the house, titling the home as joint tenants with right of survivorship makes sense. But if you want your share to go to someone else, tenancy in common is going to be the right move. Either way, you both want to sit down with a lawyer to carefully consider your options.
- Plan your break-up now. Maybe it is 100 percent amicable: One of you gets a great job across the country or gets married. Or maybe it's not. Doug Amis, president at Cardinal Retirement Planning in Cary, North Carolina, recommends you have a written exit plan. One option is to agree to a "Russian roulette clause." One borrower can offer to buy out the other or sell his shares at a specified price. The borrower handed that offer can either take it, or choose to impose those same terms on the borrower who initiated the break-up.
- Buy life insurance on each other. If you are relying on someone else for any part of your ongoing housing costs, you need to protect yourself with a life insurance policy that pays out to you in the event your co-borrower dies prematurely. "If you are unrelated, you should each buy a policy that insures the other person. That way you know the premium that protects you is going to get paid," Amis said. That's allowed if you have an "insurable interest." A stake in a home is a rather large interest.
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