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 the pros and cons to consider.
What is a Joint Mortgage Loan?
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. This could be a married couple, two friends or any other combination of people.
When applying for a joint mortgage, each person’s credit and income are considered and weighed collectively. 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.
What types of ownership are available?
There are many mortgage programs, loan types and variations from one mortgage lender to another. Because of this, it can be surprisingly difficult to understand what should be a simple concept: ownership.
Being on a joint mortgage does not necessarily mean you are a joint owner of the property. Your level of ownership will be determined by how the title agent processes the title of the home. There are five main types of title holdings or “methods” of owning a home:
- Sole Ownership: The simplest form of ownership is when a single person owns the property. All responsibility for the mortgage and property taxes falls on this one person. This may make sense in a situation where one person is the primary earner for the family, but it limits the ability of a partner or spouse to take over the mortgage if the sole owner dies or is otherwise unable to make the mortgage payments.
- Joint Tenancy: In a joint tenancy, each tenant owns an equal share of the property. If there are two joint tenants, each owns 50%. If there are three, each owns 33.3%, and so on.
- Tenants by Entirety: This is a joint tenancy between spouses only. It’s only available to married couples and, in some states, registered domestic partners.
- Tenancy in Common: Two or more people own the property together in this arrangement. Unlike joint tenancy, each owner in a tenancy in common arrangement owns a specific percentage of the property. For example, one person may own 60% while another owns 40%. This ownership can be equal or unequal.
- Community property: A special type of ownership that applies to married couples in certain states. In community property states, any property (real estate or otherwise) acquired during the marriage is owned equally by both spouses. Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
Each method of titling the home has benefits and drawbacks. You’ll want to work closely with your loan officer and title agent to ensure the home is titled according to your needs.
How Does a Joint Mortgage Loan Work?
A joint mortgage works like any other type of home loan, and the basic steps for getting a joint mortgage are pretty simple.
Each borrower will complete a loan application, or they will complete one joint-loan application. This application discloses information regarding employment history, income, debts and assets.
The lender will then review both applications and decide whether or not to approve the loan. If approved, the loan will be issued in both names, and each person will share responsibility for repaying the debt.
Obtaining a joint home loan with somebody requires each borrower to be of legal age. The borrowers also need to meet mortgage underwriting qualifications set by the mortgage lender.
Criteria might include:
- Credit score: A three-digit figure used by lenders to determine how likely you are to repay a loan. Credit score requirements will vary from one lender or program to the next, but generally speaking, you’ll usually need a score of 620 or higher to qualify for a mortgage.
- Debt-to-income (DTI) ratio: How much debt you have in comparison to how much income you earn. A healthy DTI is thought of as being under 36%.
- Down payment percentages: The amount of money needed to be paid at closing to obtain a home loan. Down payment requirements are usually a percentage of the purchase price of the home. Many loan programs and underwriting requirements will look for 20% down, but others may require less out of pocket.
- Employment verification: A call or letter from the lender to your employer to confirm proof and length of employment.
- Credit history: Obtained from reports through credit bureaus such as TransUnion®, Experian™ and Equifax®. Your credit history summarizes the past 7 years of your financial history, including late payments, collections, types of debt and more.
Documentation that might be requested includes:
- Tax returns
- W-2 forms
- Pay stubs
- Asset statements
- Completed joint mortgage application
Now that you know what areas of your finances to clean up and what documents you’ll need, it’s time to figure out how much of a loan you’re likely to be eligible for.
The lender reviews your DTI to determine how much house you and your co-applicants can afford. The lower your debt and the higher the income, the more likely the lender will extend the loan.
You use a DTI calculator to determine your DTI. This insight can help you stay ahead of the game and understand how much lenders are likely to offer.
Whose credit score gets used?
Some homebuyers 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 are interested in co-owning a home. They already live together, but they’d like to move somewhere closer to the daughter’s work (where she recently got a promotion and a big raise!) with easy single-level living to make it easier for mom to get around.
The problem is, the daughter was in a skiing accident that led to medical debt. That affected her credit score putting her below the minimum requirements for a mortgage. Meanwhile, the mother has excellent credit but relies solely on social security. She can’t afford to buy a home alone on her limited income.
Let’s assume mom has credit scores across the three bureaus of 772, 780 and 788, and the daughter has credit scores of 660, 682 and 693. The lower middle score is the lower of each person’s middle score. Mom’s middle score is 780, and 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 is a promissory note?
Assuming the loan application is approved, and the rest of the home buying process goes smoothly, next comes the promissory note.
A promissory note is a document that outlines the terms of the loan, and it’s what borrowers sign when they agree to repay the debt. This document will include the loan amount, interest rate, repayment schedule, length of the loan and more. After signing the promissory note, the loan will be funded, and the borrowers will become responsible for making monthly payments.
Pros and Cons of Borrowing a Joint Mortgage
When considering a joint mortgage, you’ll probably want to consider the pros and cons.
Let’s begin with the benefits of a joint mortgage:
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 can often be eligible for a lower interest rate than a single borrower.
By pooling your incomes, you may be able to afford a pricier property than you could 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 done. This could cause some disagreement down the road.
Whether we’re talking about a parent-child combo, a married couple or some close friends, you’re in this with them for the long haul. It can be hard to remove somebody from the mortgage if things go south.
How Do I Get Out of a Joint Mortgage?
If you get a joint mortgage with somebody, in many ways you will be financially married to them until the loan is paid off.
Let’s consider two college roommates who decided to purchase a home together to keep costs low. Neither had any plans of moving or making any significant changes, so it was a perfect, well-thought-out plan.
Everything went great for 3 years, but then one of the roommates had to go home to help care for a sick parent. They couldn’t keep up with their share of the monthly payment, and the other roommate was left holding the bag.
So, how can our roommates dissolve their joint mortgage?
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. 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 and could be hard if they don’t have a high income or don’t meet the 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 is worth requesting the other person’s name be removed at that time.
Is a Joint Mortgage Right for Me?
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 the right decision.
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 being tied to 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 decide 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 that both parties are on solid footing before taking on a joint mortgage.
If you’re wondering if it’s better to use a joint mortgage or another type of mortgage, you’ll need to identify and consider your needs. Joint mortgages will make the most sense when you might not be able to qualify on your own. They tend to work best when you have a long-term, stable relationship with the co-borrower(s).
Think back to our mother-daughter duo. They had already been living together, so they know that works for them. The ideal situation is one where both parties are vested in each other.
Make Sure They Pass the Vibe Check Before Making an Investment Together
Buying a home with someone is a hefty commitment. Anyone can get caught up in the idea of a new home, and it’s important to make sure you’re comfortable being tied to the other person, or persons, for the length of the loan. Before taking on a joint mortgage, be open and set crystal clear expectations with each other.
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. Together, assess the pros and cons of your decision. Once you’ve made considerations, move forward knowing you’ve done all you can to set yourselves up to become successful homeowners.
Internal Revenue Service. “Publication 936 (2021), Home Mortgage Interest Deduction.” Retrieved June 2022 from https://www.irs.gov/publications/p936
Nolo Legal Encyclopedia. “Marriage & Property Ownership: Who Owns What?” Retrieved June 2022 from https://www.nolo.com/legal-encyclopedia/marriage-property-ownership-who-owns-what-29841.html