Question: Last year, 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 and I’m the co-borrower. We have been splitting the monthly mortgage payments. Now my friend has moved out and wants to sell the property, which is now worth less than we paid for it.
There’s no chance of selling it for enough to recover my down payment. I have offered to buy out her equity in exchange for a quitclaim deed. She contends a quitclaim deed will not release her from the mortgage.
Answer: First of all, your friend is correct. A quitclaim deed would release her ownership interest, but not her responsibility for 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 and then fail to make the monthly payments, the mortgage lender could come after your friend because her name would still be on the promissory note even though she no longer owned an interest in the house. That’s a lousy position to be in, so you can understand her reluctance to sign a quitclaim deed.
Your situation highlights the risks inherent in two unmarried people buying a house. You have essentially entered into a real estate partnership, and as I’ve said many times before, most partnerships end badly. The partners start with a common goal but over time their goals often change. Conflict is almost inevitable, and the break-up is rarely amicable.
The smart way to handle things is to draw up a very detailed agreement before you buy that anticipates problems or disagreements and spells out what you will do in each 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 quitclaim deed and release from the mortgage.
You said that you made the entire down payment and you have been splitting the mortgage payments equally. Therefore, you have much more money invested in the house than your friend. So I don’t know how she could expect to be paid any money for equity in the property because there isn’t any due to dropping home values. But I can certainly understand why she wants to be removed from the mortgage liability.
The borrower is usually the person with the highest income. Since you’re the co-borrower, I hope you have enough income to qualify for a mortgage on your own. If not, you may be forced to sell 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 and you don’t want to sell the house, you will have to try to convince your friend that if she signs a quitclaim deed, you will not miss any mortgage payments and damage her credit rating. 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.
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 consider all of the potential consequences if something goes wrong and have a plan in place to deal with them.
Mail your real estate questions to Steve Tytler, The Herald, P.O. Box 930, Everett, WA 98206, or e-mail him at economy@heraldnet.com.
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