Key Takeaways:
In its simplest form, a joint mortgage enables multiple parties to apply for a single loan. A joint mortgage loan poses less of a risk to lending institutions in combining each party’s cumulative financial qualifications. In return, borrowers may gain access to capital that they would have otherwise never seen. At their pinnacle, however, joint mortgages democratize homeownership. In allowing several parties to jointly apply for a loan, joint mortgages make the dream of homeownership a reality for aspiring buyers who may not be able to afford today’s exorbitant prices on their own.
Joint mortgages are a creative alternative for buyers who have less access to capital, which begs the question: What is a joint mortgage? Or, perhaps even more importantly, how may aspiring buyers use joint mortgages to their advantage? Let’s take a look at everything there is to know about joint mortgages below.
What Is A Joint Mortgage?
A joint mortgage is a loan that is acquired and shared by multiple borrowers. As such, receiving approval for a joint mortgage is entirely dependent on each applicant’s individual financial situation. Each co-signer’s finances, assets, and credit score will simultaneously determine whether or not the loan is approved and its subsequent terms. Simply put, a joint mortgage is nothing more than a loan shared by several people.
When applying for a joint mortgage, each applicant’s financial standing is viewed alongside the subsequent borrowers and combined into a single metric. Not unlike a traditional mortgage, lenders will view the cumulative financial standing of each borrower and make their decision accordingly. If the loan is approved, each borrower is then legally obligated to share the responsibilities associated with paying back the loan.
It is worth noting, however, that a joint mortgage doesn’t imply co-ownership. A joint mortgage sets the ground rules for mortgage approval and who makes payments. On the other hand, co-ownership is a legal term used to describe the ownership of a single property by more than one party and is detailed on the property’s title.
Since a joint mortgage accounts for the financial standing of several borrowers, the risk on behalf of the lender is mitigated. As a result, applications may gain approval for a larger loan or even a loan they would have otherwise been turned down for. Additionally, a joint mortgage may grant borrowers better rates and terms.
How Does A Joint Mortgage Work?
Joint mortgages function a lot like traditional mortgages. Instead of a single borrower applying for the loan, however, several borrowers will apply together. As a result, the lender will look at the financial standing of each applicant and make the decision to underwrite a loan based on the cumulative result of several variables, including:
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Income
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Credit Score
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Debt
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Reserve Assets
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Employment History
If the cumulative qualifying criteria result in approval, each applicant will be expected to sign their own promissory note. Once signed, borrowers will then bear the responsibility of the ensuing mortgage obligations and loan repayment schedule. Instead of paying individually, however, the lender will require a single, joint payment on behalf of everyone.
Each co-signer on the mortgage will be expected to hold up their end of the bargain. In the event one co-signer can’t pay, the other borrowers will be expected to make up for the shortcomings of their peers. According to the terms of most joint mortgages, the lender can legally seek compensation from any or all of the borrowers. As a result, anyone considering entering a joint mortgage agreement will need to make sure they completely trust everyone they are signing with.
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Different Types Of Joint Mortgages
Joint mortgages are unique in that they promote the co-ownership of a single property without affecting the deed or title. In fact, joint mortgages will merely determine who qualifies for a loan and who makes the payments; they have nothing to do with the actual ownership of a respective home. It is entirely possible to sign a joint mortgage and own no physical real estate. Nonetheless, joint mortgages make it possible for more people to buy a home.
It is worth noting, however, that there are other ways to democratize homeownership. Concurrent real estate strategies, like those listed below, allow multiple parties to simultaneously purchase real estate assets and be listed on the title of the property:
Joint Tenants
As its name suggests, joint tenancy is a legally recognized arrangement between two or more parties to own a single real estate asset. Unlike other acquisition strategies, however, this one requires each party to own the same amount of equitable interest in the subject property; regardless of how many parties want to own the property, it must be split evenly amongst everyone. Therefore, if two parties agree to a joint tenancy agreement, they must each own exactly 50% of the asset.
Each party involved in the agreement will be listed on the deed following the purchase of the real estate asset, which means it’s not a type of joint mortgage, but instead a form of concurrent real estate. Nonetheless, joint tenancy is yet another way for several parties to purchase a home jointly.
Tenants In Common
As the most popular subcategory of concurrent real estate, tenants in common doesn’t actually refer to renters. Instead, tenants in common is an arrangement between two or more parties who share ownership in a single real estate asset. This particular acquisition strategy is a way for multiple parties to go in on the purchase of a real estate asset. However, unlike its joint tenant counterpart, tenants in common do not need to own the same equitable interest in a real estate asset. Everyone with their own interest in the property will be responsible for their part of the mortgage. As a result, tenants in common agreements are known to be more flexible.
Joint Mortgage With Parents Or Family Members
Each party who agrees to a joint mortgage may be held liable for monthly payments. More specifically, however, each borrower is expected to share the legal responsibility for paying back the loan. Therefore, any borrower who cannot keep up with mortgage obligations quickly becomes a liability to the others. If one person can’t pay, the others will be expected to make up for the shortcomings. As a result, borrowers need to be completely comfortable with the individual they enter into a joint mortgage with; that’s why many borrowers prefer to enter a joint mortgage with parents or family members.
How To Split A Joint Mortgage
Unfortunately, as far too many people are already familiar with, not everything goes according to plan. For one reason or another, individual party members may need to break their joint mortgage agreement. Otherwise known as splitting a joint mortgage, there are times when participating owners may need to sever their ties with one another.
While it is possible to split a joint mortgage, it’s not going to be easy. For starters, the remaining owners will need to take on the financial responsibility they inherit from losing a co-signer. Remember, the mortgage will remain the same, but with one less person paying it down. Additionally, the lender will need to confirm that the split mortgage is financially viable for those who remain on it.
If the remaining owners are financially capable of taking over the payments, and the bank qualifies them to do so, the next step is to give the exiting owner their entitled share of the property’s equity (before they release their share).
If the remaining owners don’t qualify to retain the mortgage without the exiting owner, they may seek out a guarantor mortgage. As their names suggest, guarantor mortgages will have another party guarantee to make mortgage payments if necessary. If that’s the case, liability for the mortgage will be transferred to the guarantor, which is not to be taken lightly. If borrowers can’t get someone else to guarantee their mortgage payments, they may need to sell the property and downsize to something more affordable.
How Joint Mortgages Affect Your Credit Score
Not unlike traditional mortgages, joint mortgages will impact the credit score of each co-signer. That said, the impact on one’s credit score is directly correlated to how they keep up with their mortgage obligations. Borrowers who keep up with mortgage payments will find that co-signing a joint mortgage will help their credit score. However, if any of the borrowers miss a payment, it can hurt everyone’s credit score. Remember, each co-signer is equally responsible for paying back the loan. As a result, everyone needs to keep up their end of the bargain for a joint mortgage to benefit everyone’s credit score.
Pros Of A Joint Mortgage
Let’s take a look at the most popular reasons someone would consider agreeing to a joint mortgage:
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Better Interest Rates: The presence of multiple borrowers lowers the amount of risk lenders take on. With multiple borrowers responsible for the debt, the likelihood of one person not paying their share doesn’t automatically result in a default. As a result, banks can offer a better interest rate, as they are less worried about compensating for a loss.
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More capital: Since banks look at the cumulative financials of each borrower, there’s a good chance the co-signers will be approved for a larger loan. Not only will they represent less of a risk, but they also have more money as a group.
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Equal Responsibility: Provided everyone is capable of keeping up with payments; borrowers should take solace in the fact that they each share equal responsibility. If borrowers can rely on their co-signers, they will simultaneously receive better rates, a larger loan, and trustworthy partners who can help in a pinch.
Cons Of A Joint Mortgage
Unfortunately, joint mortgages aren’t always beneficial to everyone involved. With that in mind, it’s equally important to consider the downsides someone may run into:
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Lower Interest Rates: In the event a co-signer has a prohibitively low credit score, their signature may negatively impact both terms and rates. If worst comes to worst, a credit score that is too low could prevent the joint mortgage from even being approved.
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Damaged Credit Score: If one of the co-signers fails to keep up with their end of the bargain, each borrower risks hurting their credit score and litigation.
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Confusion: Joint mortgages do not imply joint ownership; they simply detail how the loan will be paid. However, many find this confusing and equate that paying a mortgage means they own equity in a home. That’s not always the case and needs to be worked out beforehand.
Summary
There’s no way around it: a joint mortgage is nothing less than a double-edged sword. On the one hand, enabling multiple parties to co-sign on a single mortgage lowers costs, mitigates risk, and democratizes homeownership for more people. On the other hand, it requires borrowers to rely on the finances of others. Combining finances to pay a single mortgage sounds like a great idea in a perfect world, but things don’t always go according to plan. Since everyone in a joint mortgage is responsible for paying down the debt, any shortcomings on a borrower’s behalf will have to be made up by the other borrowers. Therefore, anyone thinking about agreeing to a joint mortgage will need to weigh the pros and cons before making any final decisions.
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The information presented is not intended to be used as the sole basis of any investment decisions, nor should it be construed as advice designed to meet the investment needs of any particular investor. Nothing provided shall constitute financial, tax, legal, or accounting advice or individually tailored investment advice. This information is for educational purposes only.
