Just to get it out of the way, you need to understand that the terms “joint ownership” and “joint mortgage” aren’t the same. For starters, you can get more funding for a home mortgage through a joint mortgage than if you applied on your own.
Now, suppose you’ve done some research online, and you’re trying to learn how to purchase a property jointly. In that case, you may have already noticed terms like “tenants in common” or maybe “joint tenancy” popping up together. They sound similar, and some might substitute one for the other. However, just because they both terms use the word “joint” in them, it doesn’t mean they’re talking about a joint mortgage.
We know that purchasing a property jointly is a critical decision. That’s why we put together this in-depth guide to clarify what these terms mean. Read on.
What Is a Joint Mortgage?
As you probably know, “joint” means “together.” By definition, this type of home loan is granted to two or more individuals. That means when you apply for a joint mortgage, you do it together. This can be you and one or more others. (Up to three partners can apply together.) Many of these loans are associated with married couples, but joint mortgages can include friends, investors, and other family members who wish to purchase a property. They can share the responsibility of the mortgage. Along with that, people who decide to apply together for a mortgage often do so because they’re able to get better terms and rates on that mortgage.
Impact on Eligibility and Financial Considerations
Applying jointly ups your eligibility altogether. However, it’s crucial to remember that just because you apply for a mortgage with partners, it doesn’t mean that everyone now owns the property together. I.E., a joint mortgage is not joint ownership. When you apply for a joint mortgage, your income, assets, and those of your partners are going to be evaluated as a combined number. When you’re trying to become eligible for a larger loan, this is good news. With that said, it’s not likely to be good news when it comes to whatever you owe. Your debt, as well as that of your intended partner, will also be looked at together.
Therefore if you or your partner has a great deal of debt, it could reduce the likelihood that your application for a joint mortgage will be approved.
Credit Score and Lender Considerations
Remember that a significant factor here will be your credit score. If you’ve responsibly paid down whatever debt you owe, your credit score should reflect that fact. It depends on who your lender is and how they view your credit score and that of any partners you may have. Some will pay more attention to the middle score, and some will focus on the lower score. Others will look at the score of whoever earns more.
Because there’s a wide variance in how lenders make their decisions, it’s wise to ask what individual lenders want to see before you apply. (Also, check your credit scores before heading in to speak to lenders!)
Benefits of a Joint Mortgage
There are a few great benefits to a joint mortgage. The first is that there are tax benefits. If you and your partners are all on the property title and live on the property, each of you can take advantage of the income tax rebate. You can also save on the property transfer tax. For example, rather than paying the whole tax by yourself, the burden gets spread out so that all partners in the joint mortgage pay a little of it.
Increased Loan Eligibility and Borrowing Capacity
Another benefit is the fact that lenders look at the combined income of you and your partners. That means you can apply and qualify for a larger loan since you will have a higher total household income. You have the opportunity to purchase more expensive real estate than if any of you applied separately. These homeowners might be able to borrow about three times of the income of the borrower who is the highest earner, plus half the other borrowers’ incomes. In some instances, the lender will total all the household incomes and multiple it by 2.5. No matter the method to determine the loan amount, many borrowers have found that they can secure more money through a joint mortgage.
Creditworthiness and Interest Rates
When applying for a mortgage, creditworthiness is always a factor. For many people, their personal credit score might be strong enough to secure a loan, and they will take advantage of a combined credit for a joint mortgage. Unlike other standard mortgage approvals, the lender will take in the credit scores of all the borrowers to average them out. This can be a huge advantage for those with damaged or poor credit.
Even if the borrowers do not have credit issues, a joint mortgage can help everyone to secure better interest rates with a higher credit score.
Drawbacks of a Joint Mortgage
Credit Score Considerations and Financial Responsibilities
Remember where we said you should check your credit score before considering a joint mortgage? This is where that warning comes in. If you have a horrible credit history and your partner’s score isn’t amazing, your score could damage your overall chances of securing a loan. In a case like that, it could be better just to go it alone and apply for an individual mortgage.
Now, after you’ve obtained a joint mortgage, the majority of drawbacks begin to show themselves. You have to remember that everyone in a joint mortgage is responsible for paying back the loan. Everyone is penalized if even one partner makes a late payment.
Moreover, everyone has to cover the costs if one partner isn’t able to pay his or her full share.
Legal and Practical Challenges in Joint Mortgages
It’s a smart move then to ensure that whomever you partner with is financially stable and trustworthy. It’s also worth noting that if your partner is your spouse, you’ll both remain responsible for the mortgage, even if you divorce. During a divorce, one of the spouses will usually agree to relinquish all ownership of the property with a quit-claim deed. This document allows the spouse to sign away all the ownership and any interest associated with the property. Unfortunately, these deeds will not affect the mortgage responsibility in a court of law. If there is an outstanding balance, all parties in the divorce are responsible for paying off the loan and must accept responsibilities of missed or late payments. As you can tell, these mortgages can be complicated when a divorce enters the picture. Removing a name from the mortgage is another hassle. If one of the borrowers would like to end the partnership, most lenders will not allow the borrowers out of the agreement. These contracts are drawn up with the assumption that the full amount of the loan must be repaid before any borrower can exit the agreement. However, if a borrower does not make a repayment, the lender may be able to remove the person from the mortgage. In most cases, this is a rare occurrence. All borrowers will be held responsible for paying down on debt on the mortgage.
Related: Should You Consider Mortgage Protection Insurance?
What Is Joint Ownership?
Here’s where the line is drawn between a joint mortgage and joint ownership. In the first, the partners share the responsibility of the loan. In the second, only the title or deed to the property determines ownership. It sounds weird, but you or your partners can take out a loan and have to pay it back, but if your name isn’t on the title or deed … you don’t own the property.
When it comes to the sharing of property ownership, two methods are conventional. The first method of joint ownership is known as “tenants in common.” The other is called “joint tenancy,” also called a joint survivorship deed. (Remember we mentioned these terms at the beginning of this article.)
Are you considering applying for a joint mortgage? Talk to one of our team members at Mares Mortgage to help you decide if this choice is right for you.
Benefits of Joint Ownership
The benefits of joint ownership are largely legal or financial in nature. For example, joint owners can share any profits that may arise if they rent out their property to others. However, most benefits become apparent when one of the owners dies. The benefits also depend on which method of joint ownership is chosen.
For instance, with joint tenancy the property avoids probate if one of the owners dies. This is beneficial since probate can be incredibly expensive and time-consuming. Thus, instead of heading to the probate court, the surviving owners receive the property automatically in an efficient, straightforward manner.
When it comes to tenants in common, which is the other method of joint ownership, there are other benefits, such as cutting the inheritance tax. It’s also an excellent way for parents to help their kids protect their money while still getting them on the property ladder.
Related: What You Should Know About Second Mortgages
Drawbacks of Joint Ownership
- Exposure to Creditors: Joint tenants are exposed to creditors who may seek repayment by laying claim to the property.
- Limited Freedom and Inheritance Rights: Joint tenants lack the legal right to transfer their property after death. Ownership in the property simply ceases to exist upon death, limiting inheritance rights and freedom to designate beneficiaries.
Complications with Tenants in Common
- Probate Court Involvement: Upon the death of one owner in a tenants-in-common arrangement, assets may get tied up in probate court, leading to complicated legal proceedings.
- Disputes and Legal Issues: Disputes often arise between surviving owners in tenants-in-common arrangements, leading to costly and time-consuming legal battles.
- Trust and Legal Compliance: Joint ownership requires trust in other individuals on the deed to act legally and responsibly. Legal issues may arise if trust is broken, potentially leading to court involvement and family disputes.
Joint Mortgage or Joint Ownership: Which One Is Right for You?
It’s important to remember that if you choose to apply for a joint mortgage, you’re responsible for the loan. Additionally, you can partner in a joint mortgage but not own the real estate in question. In contrast, just because your name might be on the title or deed doesn’t mean you’re financially responsible for paying the mortgage.
When trying to decide which is the right choice for you, it’s critical that you gain an in-depth understanding of exactly what you’re getting yourself into. You should have every question answered in full by an expert before making a life-changing choice.
Mares Mortgage has a solid reputation of honesty, solid financing knowledge, and hands-on customer service. Learn more about us and whether a joint mortgage is right for you.
Conclusion
The bottom line is that there are many legal and financial issues to consider when thinking about applying for a joint mortgage or entering into joint ownership of property. No matter which way you choose, your future is at stake. With that in mind, contact Mares Mortgage. We can help ensure that you make an informed, wise decision.
