Joint Mortgages and Shared Home Ownership
Joint mortgages (those with more than one name on them) are pretty common. Couples—married and unmarried—often purchase a home together. But did you know that more than two people can take out a home loan together? It’s less common, but it can be done; and for some people, it may be a good way to become homeowners when they otherwise wouldn’t qualify.
Why you might take out a joint mortgage
Most people take out a joint mortgage as part of a committed relationship. However, that doesn’t mean it has to be a romantic relationship! There are other scenarios in life when two or more people may want to share the financial responsibility of a home loan.
For example, aging parents and an adult child may decide to share a home and mortgage payments to not only help the parents, who may be on a limited income, but to also position the child (and possibly their spouse) to take over payments once the parents are gone.
Another example might be siblings who wish to buy a home together to defray the cost of monthly payments. Or who may receive a larger loan or better rates if they go in together on a mortgage versus trying to apply alone (more on this later).
Lastly, multiple families or individuals might put their names on a mortgage to buy a vacation home together.
How joint mortgages work
When more than one person applies for a mortgage together, lenders will request credit scores (usually the FICO score version that’s specific to mortgage risk) from each of the three major credit bureaus (Equifax, TransUnion, and Experian). For each person. Yep, that means if three people are on the application, the lender will pull nine scores total.
Usually, your score from each bureau will be slightly different. The lender will choose the middle of the three scores for each person. However, from those middle scores, they will base their lending decision and rates on the lowest credit number of the group. This means that if one person on the application doesn’t have good enough credit, the lender may not approve the loan at all.
Now, if everyone in the group (or pair) has decent credit, applying for a joint mortgage can be advantageous because it raises the total considered income and debt-to-income ratio (DTI). Again, this can also work as a disadvantage if one person has lots of debt.
Those who share a joint mortgage are equally responsible for making on-time payments every month. This doesn’t mean that in a two-person joint mortgage each is responsible for paying 50 percent of the bill; each signatory on the loan is responsible for 100 percent of all payments. This may sound like the math doesn’t add up (or adds up too much), but what it means is that the lender doesn’t care what percentage of the mortgage payments each person makes, only that it’s paid entirely. If a partner comes up short, the other is fully responsible for covering the difference.
As with any shared financial investment, there are risks. If one person stops contributing their portion of payments, all other parties are responsible for making up the difference. And the only way to remove a person’s name from the loan is to refinance the mortgage into a new loan only in the name of the people or person staying in the property.
If qualifying for a home loan is your biggest concern, consider having a relative act as co-signer. Or, if you’re buying a vacation home, consider putting the mortgage in a single name with a legal, binding contract to ensure everyone holds up their end of the financial burden. It will offer more protection if one or more parties stop paying for their share of the property and will make it easier if one family wishes to leave the arrangement or another wishes to join.
Believe it or not, having a name on the mortgage doesn’t necessarily or exclusively define ownership. It only lists who is responsible for paying back the loan. The title or deed of a home establishes ownership, and there is no limit to the number of names that can be on this document. So, if a stake in ownership of the home is your biggest concern, consider having the mortgage in the name of the people or person with the strongest credit and DTI, with only your name added to the title.