Can You Combine Incomes to Buy a House?

Combining incomes to purchase a house is a common strategy that broadens homeownership opportunities. This approach allows multiple individuals to pool their financial resources, potentially qualifying for a larger mortgage loan than they might individually. It helps mitigate the financial burden of homeownership, making it more accessible for many, especially in competitive housing markets.

Who Can Combine Incomes

Many different types of relationships can involve combining incomes for a home purchase. Married couples frequently pursue joint mortgages, where both partners contribute their financial information to the loan application. Unmarried partners also commonly combine their incomes, as lenders generally do not discriminate based on marital status. The primary consideration for these couples is their collective financial standing and ability to meet loan obligations.

Family members often co-borrow to buy a house, including parents and adult children, or siblings. Parents might help an adult child qualify for a first home by co-signing or co-borrowing, leveraging their stronger credit and stable income. This arrangement can be particularly beneficial in situations where one individual’s income or credit history alone might not meet lender requirements. Even friends or other unrelated individuals can combine incomes to purchase property together. Regardless of the relationship, all parties on the loan application become equally responsible for the mortgage repayment.

Lender Assessment of Combined Incomes

Mortgage lenders thoroughly evaluate the financial profiles of all applicants when assessing a joint mortgage. Lenders combine the gross incomes of all applicants to determine the overall household income available for mortgage payments. This combined income often allows borrowers to qualify for a higher loan amount than if they applied individually. Lenders verify income through documentation such as W-2 forms, 1099s, recent pay stubs, and tax returns for the past two years.

The credit scores of all co-borrowers are also a significant factor in the lending decision. Lenders typically review each applicant’s credit score, often focusing on the lowest median score among them when determining qualification and interest rates. A lower credit score from one applicant could potentially lead to less favorable loan terms or even impact the approval. Conversely, a strong credit score from one co-borrower can sometimes help offset a weaker score from another, though the overall combined credit profile is what matters.

Lenders calculate a combined debt-to-income (DTI) ratio for all applicants. This ratio compares the total monthly debt payments of all borrowers to their combined gross monthly income. Most lenders prefer a DTI ratio no higher than 43% to 50%, depending on the loan type and lender. A lower DTI indicates less risk to the lender, as it suggests the borrowers have sufficient income remaining after debt obligations to comfortably afford mortgage payments.

Employment history and stability for each borrower are also carefully considered. Lenders generally require a stable employment history, often looking for at least two years of consistent employment. They want to see proof that each applicant has a reliable source of income to meet ongoing mortgage obligations. If an applicant has recently changed jobs or has gaps in employment, lenders may require additional documentation or explanations to verify income consistency.

Structuring Co-Ownership

After a joint mortgage is approved and the property is purchased, establishing clear co-ownership terms becomes important. Two common forms of property ownership for multiple parties are Joint Tenancy with Right of Survivorship (JTWROS) and Tenancy in Common (TIC). Joint Tenancy with Right of Survivorship grants equal ownership shares and equal rights to the property, meaning if one owner dies, their share automatically transfers to the surviving owner(s) without going through probate. This structure is often chosen by married couples due to its automatic transfer of ownership.

Tenancy in Common allows co-owners to hold unequal shares in the property, and there is no right of survivorship. If a tenant in common dies, their share passes to their estate or designated heirs, not automatically to the other co-owners. This option offers greater flexibility for unmarried partners, friends, or family members who might have contributed different amounts to the down payment or ongoing expenses, or who wish to pass their share to specific beneficiaries.

Creating a formal co-ownership agreement is highly recommended to outline responsibilities and address potential future scenarios. This legal document can detail how mortgage payments, property taxes, insurance, and maintenance costs will be divided. It can also establish procedures for situations like one party wanting to sell their share, one party moving out, or the death of an owner. Such an agreement helps prevent disputes and provides a clear framework for managing the shared property.

Co-owners can also benefit from certain tax deductions. Each co-owner is typically entitled to claim a share of eligible tax deductions, such as mortgage interest and property taxes, on their individual tax returns. The deduction for state and local taxes, including property taxes, is generally capped at $10,000 per household ($5,000 if married filing separately). Mortgage interest on the first $750,000 of mortgage debt ($375,000 if married filing separately) is deductible. For tenancy in common, deductions for property taxes can often be split according to the ownership percentages, or based on who paid the expenses, provided it’s clearly documented. If the property is sold, each co-owner can typically exclude up to $250,000 of their share of the capital gains from their taxable income, provided they meet specific ownership and use tests.