1. Have an open conversation before you sign a contract.
Talk about what each of you will be able to contribute financially. Discuss your expectations of each other. Probe each other's credit histories. Obtain credit reports.
"Remember that one person's bad credit can make the mortgage rate significantly higher," Corcoran warns. "Also, any outstanding debt or unpaid loans can be later filed as a lien against your property. "
2. Hire an attorney.
If you want to do it right, you should have two separate written agreements: the property agreement and the cohabitation agreement. an attorney will know which points to cover in each contract.
3. Put everything in writing.
Create a detailed document which outlines your original intention. This will help avoid confusion in the future. "Friendship can easily turn to warfare," Corcoran points out.
4. Make a property agreement.
This document determines who owns the house and whose name is on the deed. Corcoran suggests that both names should be on the mortgage and the deed.
The property agreement also specifies who pays what towards the down payment and mortgage. In addition, it determines how the appreciation will be shared and how capital gains will be divided.
And don't forget, Corcoran reminds, you should buy the house as "tenants In common." This type of ownership provides the most protection for each party and the greatest amount of clarity.
5. Draw up a cohabitation agreement.
Just like a pre-marital agreement , this document covers what happens if you part ways. Corcoran suggests that you include items like getting an independent appraisal to establish value, giving three-month's notice, and allowing each person the first option on the other partner's interest.
It should also include who contributes what to mortgage payments and repair costs and who gets the tax deductions for the property taxes and mortgage interest.
6. Buy term life insurance.
You or your friend could die before the property is ultimately sold. So Corcoran advises that you should buy a term life insurance policy and name the other as beneficiary. In the event of death, the whole mortgage will be paid off by the insurance policy.