Question: I purchased a home as tenants in common with a friend. I paid more than $40,000 down and my friend paid nothing down.
My friend is listed as the “borrower” on the loan and I’m the “co-borrower.” We have been splitting the monthly mortgage payments.
Now, we are at odds with each other. My friend has moved out and wants to sell the property. Since the housing market has slowed down, the house is worth less than we paid for it, so there is no chance of selling it for enough to recover my down payment after selling expenses.
I have offered to buy out her equity in exchange for a quit claim deed. She has rejected my offer, contending that a quit claim deed will not release her from the mortgage obligation. I think it will.
Answer: First of all, your friend is correct. A quit claim deed would release your friend’s ownership interest in the house but it would not release her responsibility for the mortgage payments. Those are two separate issues. A mortgage is a lien against the property, which is not the same as a deed.
If you were to take title as the 100 percent owner of the house and then fail to make the monthly loan payments, the mortgage lender could come after your friend for the payments because her name would still be on the promissory note, even though she no longer owned an interest in the house.
That is a lousy legal position to be in, so you can understand her reluctance to sign a quit claim deed.
Your situation highlights the risks inherent in two unmarried people buying a house together. You have essentially entered into a real estate partnership, and as I’ve said many times before in this column, unfortunately most partnerships end badly.
The partners start out with a common goal, but over time their goals and desires often change. Conflict is almost inevitable, and the break-up is rarely amicable.
The smart way to handle this kind of transaction is to draw up a very detailed partnership agreement before you purchase a home together. This agreement should anticipate every conceivable problem or disagreement that might come up during your ownership of the property and spell out exactly what you will do in each and every circumstance.
For example, you could agree in advance that if either of you ever wants to sell the house, the other party would have the option to buy out the partner in exchange for a quit claim deed and release from the mortgage.
The advantage of drawing up such a contract is that you have a chance to calmly and rationally work out problems before tempers flare.
In your letter, you said that you made the entire $40,000 down payment and you have been splitting the mortgage payments equally. Therefore, you have much more money invested in the house than does your friend.
So I don’t know how she could expect to be paid any money for her equity in the property because there isn’t any equity at this point due to dropping home values.
But I can certainly understand why she wants to be removed from the liability of the mortgage on the house.
You said that your friend is listed as the “borrower” on the mortgage and you are the “co-borrower.” The borrower is usually the person with the highest income, so do you have enough income to qualify for a mortgage on your own?
If not, you may be forced to sell the house in order to get your friend’s name off of the mortgage, unless you can find somebody else to be a co-borrower with you on a new home loan that would be used to refinance the existing mortgage.
If you can’t qualify for a mortgage and you don’t want to sell the house, you will have to try to convince your friend that if she signs a quit claim deed to you, you will not miss any mortgage payments and damage her credit rating.
Even though you’re not getting a “divorce,” you might consider drawing up a legal “property settlement agreement” in which you assume total liability for all future mortgage payments on the house.
That agreement could be recorded at the county courthouse and your friend could use it to help clean up her credit rating if and when there were ever any late payments on the mortgage.
However, that would leave her in a dangerous financial position, so I would not be surprised if she refused to do that.
Again, let me emphasize that this story illustrates the dangers of two unmarried people buying a home together. Any readers who are considering entering into a similar arrangement should seriously consider all of the potential consequences if something goes wrong, and have a plan in place to deal with those problems before they happen.
Steve Tytler is a licensed real estate broker and owner of Best Mortgage. You can email him at features@heraldnet.com.
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