Buying a home comes with a host of challenges and hurdles. Buying a home with your parents can add to these. But if you carefully research homes and mortgage programs before you buy, and if you work closely with your parents to set clear goals on what type of home and living arrangement you both want, you can eliminate many of the bigger challenges. By combining your income with that of your parents, both you and your parents might be able to land a better home.
Pros and Cons
Before deciding to buy a home with your parents, make sure you understand both the positives and negatives of such a decision. On the plus side, when applying for a mortgage loan you can use the income of both yourself and your parents. This might allow you to qualify for a larger mortgage loan and, because of this, a more expensive home. On the downside, finding a home you and your parents like can be difficult. You'll also have to set up clear rules for who is responsible for making housing payments, mowing the lawn, cleaning the home and otherwise running your new residence.
Applying for a Loan
Before you and your parents start searching for a home, you should get preapproved for a mortgage loan. In a preapproval, lenders study your finances and credit and that of your parents. Lenders give you a preapproval letter stating how much of a mortgage loan they can extend to you. A preapproval letter makes you and your parents more attractive buyers to sellers. Lenders use all borrower income when you apply jointly. They also combine your monthly debts, which typically can equal about 36 percent of your combined gross income. If your own income is low, applying jointly could help you qualify for a mortgage loan that may otherwise be out of your reach.
Credit could pose a problem if you are applying jointly with your parents. Lenders only rely on the lowest credit score among joint applicants. If your credit score is 740 and your father's is only 620, your lender will throw out your score and base its lending decisions on your father's lower one. This could leave you with a higher interest rate or, if the credit score is too low, a rejected loan application. Credit, then, could dash your hopes of applying jointly for a mortgage loan.
Residential Loan Application
If you and your parents apply for a mortgage loan jointly, you have to provide key financial information on the lender's Uniform Residential Loan Application. You must also provide information on employment and job history. Once you and your parents complete this form and send it to your lender, the mortgage application process officially starts.
Searching for Homes
After you and your parents are preapproved for a mortgage loan, you can begin the search for a new home. Work with a real estate agent who knows the neighborhood in which you want to live. Make sure to consider what everyone buying the new home wants: You might want to live close to your job in a metro area and your parents might want to live in a suburban single-story ranch home. You'll need to keep everyone's needs in mind when searching for the right home.
You can submit a written offer -- usually through your real estate agent -- to the sellers. If the sellers accept your offer, you can move ahead with the purchase. If the sellers reject it, you and your parents may decide whether to make a counteroffer. Make sure both you and your parents are comfortable with raising the offer price or changing sale terms. Unless everyone is in agreement, move on to another home.