How to Make a Multi-Generation Home Purchase Work
Here's how to make a home purchase work when two or more generations move in together.
Perhaps it is no surprise that there's been a jump in the number of multigenerational living situations in the U.S. According to Generations United, 7% of Americans lived in multigenerational homes in 2011. By 2021, the percentage grew to 26%. That's one in four of us living with three or more generations of family.
While multigenerational living was once the norm in America, scattered families and media images (think all the way back to Leave it to Beaver and The Brady Bunch) convinced us that the American Dream usually consisted of a single-family home with two parents and their kids.
Barely a decade after the Great Recession devastated the housing market, and with an ongoing pandemic, families often find strength and financial support in each other. Here, we discuss the realities of sharing a mortgage and offer suggestions for heading off conflict.
Buying a home together
Maybe you're moving into a family member's home, and you've decided to make the living arrangement permanent by refinancing the property as joint owners. Or maybe you're looking for a new home to live in together and plan to take out a new mortgage. Whatever your situation, buying a home as joint owners is reasonably straightforward.
You'll find the process similar to buying a home as an individual. The significant difference when there's a joint application is that both sets of income and assets are taken into consideration. Combining income and assets may mean you qualify for a more expensive home. However, if one party has poor credit, the lender looks at the "weakest link" to determine the risks of granting the mortgage.
Let's say you're buying a home with your parents, and your dad has a history of missed payments. A mortgage lender looks at your father's low credit and worries that they can't count on him to help make the mortgage payments. If you have an excellent credit score and enough income to make the mortgage payments independently, they won't be as concerned. However, if you're counting on your dad's income to make payments, there may be a problem. In this case, the lender may deny your loan application or offer you a higher interest rate.
This leads us to our next suggestion:
Be honest about who you're moving in with
Whether you plan to buy a home together or already have a home you can all live in, be honest with the people you expect to pay living expenses. When you live with someone, your finances (and often, your financial reputation) becomes tangled up in theirs. If you can't count on the other adults in the household to pay mortgage, utilities, maintenance, or additional costs associated with owning a home, admit it -- if only to yourself.
Know that living with an irresponsible person means you may be forced to become ultra-responsible. If they don't pay their portion of the mortgage one month, you'll need to cover the entire thing. If they frequently forget to pay the water bill, your credit could take a hit. Awful as they are to contemplate, it's important to imagine worst-case scenarios. If, for instance, you are injured and go into a coma, could you trust that other person (or people) to ensure everything is paid in full until you awake? If not, think twice about cosigning anything.
Get it in writing
This may be awkward, but the smart move is to ask each other hard questions before moving in together. These questions may include:
- Do we only want one of our names on the mortgage, or will we own it jointly?
- Are we splitting the down payment? If not, who will pay for it?
- Are we splitting the mortgage payment? How much will each of us pay each month?
- Do you have money in an emergency fund to cover bills in the event of a job loss or unexpected illness?
Once those questions are answered to everyone's satisfaction, seriously consider hiring an attorney to draw up an agreement. The national average cost per hour for an attorney is around $240. Any fee you pay for a written agreement may be worth its weight in gold, particularly if it heads off disagreements.
- Missed payments: What happens if one party does not make their portion of the mortgage payment?
- Approved occupants: Who else can move into the house? Let's say you're purchasing a home with your parents, and your sister and her four kids want to move in on your parent's dime. Is that okay? Would you rather decide in advance that only certain people can live in the house?
- Death of one (or more) owners: What happens when one of the joint owners dies? This is an important question. If a co-owner dies and you have a joint mortgage, their share of the property passes to you. If you purchase the house as tenants in common, that means that you each have the right to leave your portion of the property to whomever you want. If it's important that the house be left to you, get it in writing.
- Taxes: Which party will claim the interest payments on their tax return? Will you split them?
- Estate planning: Should you cover each other financially in the event someone dies? In addition to deciding who gets the house, determine what happens next. For example, let's say you've purchased a home with your parents. Together, your family can make the monthly mortgage payment, but your parents would not have enough income to stay in the house if you died. Decide if you should take out life insurance specifically to cover your half of the mortgage, or whether you want to leave funds to help them cover your portion of the mortgage even after you're gone.
Here to stay
With 66.7 million adults in the U.S. living in multigenerational households, and 72% of those people saying they plan to continue the practice long-term, it looks like multigenerational living is here to stay. Perhaps the easiest way to make it work is to anticipate what could go wrong and work together to develop a plan to head off those issues.
A historic opportunity to potentially save thousands on your mortgage
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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