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Are you considering buying a home with someone else? If so, you’re going to want to know about joint mortgages. A joint mortgage is when two or more people borrow money from a lender to purchase a home.
This article will explain everything you need to know about joint mortgages. We’ll cover how they work, who has ownership of the home, when and why they might be a good option, as well as pros and cons to consider.
What Is a Joint Mortgage Loan?
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A joint mortgage is a home loan where two or more people purchase a home and share responsibility for repaying the debt. Joint applicants could be a married couple, family members, friends, business partners or any other combination of joint applicants.
When applying for a joint mortgage, both applicants’ credit and income are considered. This can make it easier to qualify for the loan, acquire a higher loan amount and potentially receive a lower interest rate compared to applying alone.
How Does a Joint Mortgage Work?
A joint mortgage works like any other type of home loan, and the basic steps for getting a joint mortgage are fairly simple.
Each borrower will complete an individual loan application, or borrowers can collectively complete a joint-loan application. If approved, the loan will be issued in the names of all applicants, and each person will share responsibility for repaying the debt.
Joint Mortgage Requirements
To qualify, all borrowers also need to meet mortgage underwriting qualifications set by the mortgage type (conventional, FHA, VA, etc.). These usually include:
- Credit score: Credit score requirements vary between different lenders and programs, but borrowers typically need a score of 620 or higher to qualify for a conventional mortgage.
- Debt-to-income (DTI) ratio: A healthy DTI ratio is thought to be under 36%, though you may be able to qualify with a DTI ratio of 41%.
- Down payment: Depending on the type of mortgage loan, you’ll probably need to make a minimum down payment of 3% – 20%.
- Employment verification: You should expect the lender to contact your employer to confirm proof and length of employment.
How many people can be on a joint mortgage?
Wondering if you can get a three-way mortgage? There’s no legal limit to the number of people who can be on a mortgage – although your lender may have their own restrictions. Also, lenders will usually insist that everyone on the mortgage must qualify for the loan.
Whose credit score gets used?
Some home buyers might wonder whose credit score is used on a joint mortgage. The answer is that both credit scores are used, and most lenders will go by the “lower middle score,” which is the lower of the two middle credit scores.
Say we have a mother and daughter who’re interested in co-owning a home. Across the three bureaus, let’s assume the mom has credit scores of 772, 780 and 788, and the daughter has credit scores of 660, 682 and 693. This means the mom’s middle score is 780, and the daughter’s is 682. Using the lower middle score computation, the loan would be rated based on the daughter’s middle credit score of 682.
What Types of Joint Ownership Are Available?
Being on a joint mortgage doesn’t always mean you have an equal ownership share of the property. Your level of ownership and rights of survivorship are determined when you and your joint applicant(s) apply for your mortgage loan.
The following are some of the most common types of joint ownership between two or more home buyers.
Tenancy by entirety
This joint ownership arrangement is usually reserved for married couples and (in some states) registered domestic partners. It provides both applicants with equal ownership in the property. It also ensures that if one spouse or partner dies, the surviving spouse automatically owns the home.
Tenancy in common
In this arrangement, two or more people own the property together. Unlike tenancy by entirety, each owner in a tenancy in common arrangement owns a specific percentage of the property, which can be equal or unequal. For example, one person may own 60%, while another owns 40%.
Also, unlike tenancy in entirety, if one owner dies, they can leave their ownership in the property to someone other than their spouse or partner.
Joint tenancy loan
A joint tenancy mortgage loan allows three or more co-borrowers to get a mortgage together. With a joint tenancy agreement, all co-borrowers are entitled to an equal ownership share in the home.
In some cases, it’s possible to get a joint tenancy with rights of survivorship (JTWROS). Similar to tenancy by entirety, a JTWROS means the rights of ownership automatically go to the surviving owners.
Pros and Cons of a Joint Mortgage
When considering a joint mortgage, you’ll likely want to know the pros and cons.
If one applicant has a poor credit score or low income, adding a second applicant with a good credit score and strong financials can increase the chance of being approved for the loan.
Two borrowers may be eligible for a lower interest rate than a single borrower.
By pooling your incomes, you’ll be able to qualify for a pricier property than if you were applying alone.
If one party stops making mortgage payments, the other is still responsible for the full monthly payment. This is true regardless of the reason, including if the co-borrower becomes disabled or dies.
If one person wants to sell the property, both parties must agree before it can be sold. This could cause disagreements down the road.
Whether we’re talking about a parent and their child, a married couple or close friends, you’re in this together for the long haul. It can be hard to remove somebody from the mortgage if things go south.
How To Get Out of a Mortgage With Someone
If you get a joint mortgage loan, you’ll essentially be financially married to your co-borrower until the loan is paid off. However, if it’s necessary to dissolve a joint mortgage agreement before then, there are ways to do so.
Sell the home
The first and most obvious option is selling the home and splitting any proceeds. Once the home is sold, each person would receive their share of the profits and be free from the mortgage. However, if you and your co-borrower don’t have enough equity to repay your mortgage, you risk having to sell your home at a loss or negotiating a short sale with your lender.
Refinance the home
If one person wants to stay in the home, they could refinance the mortgage into their name only. Of course, this would require qualifying for an adequate mortgage on their own, which could be difficult if they don’t have a high enough income or minimum credit score.
Pursue a loan modification
If neither person can afford the mortgage payment on their own, they may be able to pursue a loan modification. This would require working with the lender to change the loan terms, such as extending the length of the loan or lowering the interest rate. It could also be worth requesting the other person’s name be removed at this time.
Is a Joint Mortgage Right for You?
Before you decide to take on a joint mortgage with another person, it’s important to ask yourself a few questions to see if it’s right for you.
Are you comfortable being tied to this person for years?
If things go south between you and your co-borrower, getting out of the mortgage can be tricky. Be sure you’re comfortable working with this person for the length of the loan, which is typically 15 – 30 years, or until the home has been sold.
Would you be able to support the loan on your own?
Should one person want to sell the property, both parties must agree to it. This could cause serious disagreements if one person is financially stable and the other isn’t. It’s important to make sure both parties are on solid footing before taking on a joint mortgage.
If you’re wondering whether it’s better to use a joint mortgage or another type of mortgage, you need to consider your specific needs. A joint mortgage could make the most sense when you can’t qualify on your own. They tend to work best when you have a long-term, stable relationship with the co-borrower(s).
Make Sure a Joint Mortgage Is the Right Investment
Buying a home with someone is a hefty commitment.
You and your co-borrower deserve to buy your home with confidence, but it’ll probably take some tough discussions. Evaluate your financial situation, and ensure they have, too. Then, assess the pros and cons of the decision together. Once you’ve made these considerations, move forward knowing you’ve set yourselves up to become successful homeowners.
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The Short Version
- A joint mortgage loan is a type of home loan where two or more people purchase a home and share responsibility for repaying the debt
- Being on a joint mortgage does not necessarily mean you are a joint owner of the property
- You can try to get out of a joint mortgage by selling the home, refinancing or completing a loan modification