By Daniel Duffield
Joint mortgages can provide prospective homebuyers with the access to much more funding for a home mortgage than a traditional mortgage loan, however, joint ownership does not necessarily mean that the borrowers each share ownership of the property.
By definition, a joint mortgage is a home loan granted to two or more people. Although typically associated with married couples, joint mortgages may also involve other partnerships, such as investors, friends, or family who wish to purchase a property together and share responsibility of the mortgage.
Joint Mortgage Benefits
One significant benefit of using a joint mortgage is that borrowers may qualify for much larger loans; with a much greater total household income considering the two parties as a single unit, joint mortgages allow borrowers to apply for loans which they would be unable to receive with their individual income. Basically, when securing a loan, the lender will evaluate the total income when considering the loan application, both increasing the likelihood of approval and allowing borrowers to purchase a more expensive property than would be possible to purchase alone.
Generally, homebuyers will be able to borrow approximately 3 times the income of the borrower who earns more plus half of the other individual’s income. In some cases, lenders will total the household income and multiply by 2.5, although regardless of the method, borrowers can certainly secure more money through a joint mortgage.
Combined Credit for Joint Mortgages
Many borrowers choose to enact a joint mortgage in order to take advantage of the combined credit. Unlike standard mortgage loan approval, approval for a joint mortgage takes into consideration the credit scores of both borrowers together. This can be enormously advantageous to borrowers with poor or damaged credit, as application for a joint mortgage with a decent credit borrower will essentially cancel it out. Even borrowers who may have no trouble obtaining a mortgage loan could still benefit from a joint mortgage by securing better interest rates with a higher credit borrower.
Joint Mortgage Drawbacks
Joint Mortgage Liability
Since both or all parties share responsibility of the loan, those involved in a joint mortgage are equally liable for the repayment of the loan and equally affected by negative or positive credit activity as a result of the mortgage management. While the simultaneous improving of credit may be enormously advantageous for some, many borrowers opt out of joint mortgages due to the potential for negative credit activity beyond one’s control. In other words, if you take out a joint mortgage with a friend and he or she fails to make a payment, you will be held responsible and your credit will suffer if the payment is not received on time.
Joint mortgages can become quite complicated affairs during divorce proceedings. During a divorce, generally one spouse will agree to relinquish ownership to the other through a quit-claim deed. While this represents the signing away of all interest and ownership of the property, quit-claim deeds do not carry much weight legally and have no effect on mortgage responsibility. Therefore, in the event of an outstanding mortgage balance on a joint mortgage shared by a divorcing couple, both parties would remain responsible for paying off the loan and would endure the credit-related consequences of any late or missed payments; if either person did not make his or her share of the payment, the other person would still be held responsible, even without any rights of ownership over the property.
Joint Mortgage vs. Joint Ownership
While a joint mortgage allows the sharing of mortgage payments and accountability, it does not necessary imply joint ownership; ownership is determined by the title or deed, not the loan used to acquire it. Essentially, a joint mortgage is a sharing of finances and credit responsibility, not the sharing of a property. Many couples choose to apply for joint mortgages in order to combine their incomes to qualify for larger loans, and this may or may not include the sharing of property ownership.
Joint Ownership Documentation
For documenting a joint ownership, there are two common methods: joint tenancy (also known as a joint survivorship deed) and joint ownership as tenants in common.
- Joint Tenancy– With joint tenancy, in the event of one person’s death, property ownership is automatically allocated to the sole survivor. This practice requires a joint survivorship deed, and proving ownership additionally requires a recorded death certificate of the deceased. Generally, joint survivorship is preferable for married couples.
- Tenants in Common– Tenants in common own an equal share of the property, and in the event of an owner’s death, the share of ownership would be transferred to his or her survivor(s) in probate court.
For anyone considering a joint mortgage application, be sure that all parties understand the responsibility and risk involved in co-managing a mortgage. Always have a plan for the worst case scenario and be prepared to execute this plan should the partnership dissolve. If you are considering a joint mortgage, consult an attorney and be aware of your full rights and responsibilities for this partnership.
Splitting a Joint Mortgage
While splitting a joint mortgage can be complicated, there are several methods for reallocating the ownership of a mortgage:
Removing a Name from the Mortgage
When one of the borrowers in a joint mortgage would like to end the partnership, lenders typically will not allow either of the borrowers out of the loan agreement; joint mortgage contracts are agreed upon with the assumption that the loan will be repaid before one of the borrowers can exit the agreement. However, if one of the borrowers does not contribute to the repayment of the loan and the lender acknowledges this, he or she may be willing to remove this individual from the mortgage, although this is unusual, and in most cases, both borrowers will still be held responsible for paying the debt.
Refinancing a Joint Mortgage
The most straightforward way to split a joint mortgage is simply through a refinance transaction. Through a refinance, borrowers can alter the terms of the loan, and the person residing in the property can retain the mortgage debt while removing the other borrower. In some cases, however, the borrower remaining in the property will have to repay the other borrower for the equity invested in the property. Furthermore, the borrower living in the property may find it difficult to refinance the mortgage loan under a single household income.
As previously indicated, some co-borrowers choose to utilize a quitclaim deed in order renounce any rights to the property, bestowing these rights to the other individual under the mortgage. Although a quitclaim deed may remove a borrower’s name from the title of the property, it does not legally absolve the borrower from the responsibility of paying the mortgage. Even if your name has been removed from the title, you can still be liable for mortgage repayment; if the individual staying in the home does not continue to make mortgage payments, the other borrower can still receive derogatory credit marks. Therefore, refinancing is a much more beneficial and effective option over a quitclaim deed.
An additional option for breaking up a joint mortgage is through a mortgage assumption, though this strategy is uncommon as most mortgages cannot be assumed. However, if the parties involved in the joint mortgage have an assumable loan, the borrower living in the house can assume the remaining half of the loan and simply remove the other individual from the mortgage. In order to perform a mortgage assumption, the loan must be assumable, and the lender must give his or her approval.