How can lenders and other mortgage professionals help first-time homebuyers sign the deed and snag the keys? That’s an increasing conundrum in a housing landscape fraught with frustration— and some prospective homebuyers have opted for an unconventional solution.

There are 46.1 million people in the U.S. between the ages of 25 and 34—an increase of 6.6 million since 2006, according to recent Freddie Mac research. But with an estimated shortfall of around 3.8 million houses, there aren’t nearly enough dwellings for this growing segment of potential homebuyers. One way some have approached homebuying is to pool financial resources and purchase a house with a group of friends or family members.

The concept of unrelated co-buyers finding and funding a house can be appealing to first-time homebuyers elbowing their way into a crowded, demanding market. But the upsides for this cohort are met with logistical considerations and legal ramifications. Those in the industry working with buyers considering this scenario should be mindful of sharing both the benefits—and the potential pitfalls—of this creative arrangement.

Several Factors Are Inspiring Non-Traditional Housemates

Housing challenges, coupled with historical inflation rates not seen since the 1970’s, are inspiring some would-be homeowners to rethink their strategy and take a different tack. Long-existing supply issues were met by historically low interest rates during the pandemic, surging home prices, bidding wars and all-cash offers that priced out and discouraged many buyers. The rental market has also seen change: rents rose 10 percent in 2021 and are expected to increase four percent more in 2022. According to the Freddie Mac research on home price growth, the number of high-income renters aged 25-44 has doubled over the past decade, and there aren’t enough homes for renters at any income level.

According to ATTOM Data Solutions, from 2014 to 2021 the number of co-buyers with different last names increased 771 percent. While domestic partners with different last names may account for a portion of this uptick, so may the trend of friends purchasing homes together. This innovative approach could provide an earlier path to homeownership and wealth building and serve as a workaround to rising prices and lack of inventory. It could also alleviate down payment challenges, especially for millennials and the emerging Gen Z homebuyer demographic.

What These Homeowners Should Know Before—And After - Signing

It’s critical for anyone considering this situation to first consult an attorney in their jurisdiction, as the definition of “joint tenancy” varies by state. While Freddie Mac will purchase mortgages with multiple borrowers who are unrelated parties, all borrowers must be underwritten and qualified in accordance with Guide requirements. Still, it’s important to weigh the potential downsides to this approach. For example, there may be varying credit among the co-buyers, which could impact loan level pricing adjustment.

Also, co-ownership of a house with friends or family members carries the possibility that one or more borrowers may eventually decide that the arrangement no longer suits their needs or life goals. If that happens, the person or persons staying in the property may refinance the mortgage, keeping in mind they need to qualify without the ex-owner’s added income. Also, with a 3% down payment and a flattening home price index, it is unlikely a property could be sold for a profit with one to two years from the purchase. The individual looking to exit the mortgage will likely have to bring cash to the closing table to get out of the arrangement. HomeOne® is a loan option for first time homebuyers who need flexible financing for single-family homes including townhouses and condos. It requires a minimum down payment of 3% and buying a home with friends “counts” towards eligibility requirements.

Individuals interested in homeownership should also consider down payment assistance programs as it may be the better option

Clever Use of Renovation Funding Can Make A Single-Family Home Work for Multiple Owners

This atypical co-owning scenario may generate a need to reconfigure the dwelling to better suit its individual occupants. Those in the lending ecosystem can promote renovation funding as a tool allowing borrowers to purchase a home while funding major or minor repairs or updates that better suit these homeowners’ needs for work and leisure. These may include creating multiple home offices, converting or reconfiguring bedrooms, closets or dining rooms, building an ADU as a more private living arrangement, finishing a basement or adding or updating a deck or patio to maximize square footage.

While this situation isn’t suited to everyone, and logistics and expectations must be carefully considered, co-buying with family or friends is an option that some homebuyers have considered in a housing market that   might otherwise be elusive or unfeasible. Learn more about how Freddie Mac is there to support all first-time homebuyers on their homeownership journey.