In the past, the two most common homeowner categories were a married couple or a single person. But now, it’s not uncommon for family members or friends to purchase a property together, which may also require jointly applying for a loan.
What are the pros and cons of entering into this type of arrangement? More importantly, what are the legal ramifications? We’ll discuss the various scenarios in which a joint mortgage might be a good or a bad choice, and explain the application process.
Why Purchase Shared Housing?
There are many scenarios in which you might want to take advantage of shared housing with a joint mortgage might be advantageous. According to Aaron Dorn, chairman, president, and CEO of Studio Bank in Nashville, Tennessee, shared housing can be a great option for people with non-traditional housing needs. “One size doesn’t fit all, and there’s an endless array of factors that can influence what form of housing is ‘best’ for any given situation,” he told The Balance by email.
For example, friends who rent an apartment together may decide that buying a home together could result in lower monthly payments than renting. Or, if the home is expensive, one person might not be able to make the mortgage payment alone—but by pooling resources, two or more people might find it affordable. Couples who are not married may also want to purchase a home together for the same reasons.
A joint mortgage can also be beneficial for families. “As people are living longer and pensions are going away, multigenerational housing is becoming commonplace once again,” Dorn said.
And there are additional reasons why someone might find a joint mortgage advantageous. “Some people have a secondary residence—like a vacation home—where they live part of the year,” Melinda Wilner, chief operating officer at United Wholesale Mortgage in Detroit, told The Balance by email.
Families and friends might pool their resources to purchase a getaway home if they frequent the vacation destination and stay for extended periods of time. This can be less expensive, more convenient, and safer than staying in a hotel.
“Also, some people could be pooling their resources to purchase an investment property, which will be used to generate additional income,” Wilner said. For example, this could be a property that is rented out at a monthly amount.
Joint Loan vs. Co-Signing
Some people confuse a joint loan with co-signing for a mortgage, but there are differences between the two. According to Dorn, with a joint loan, all parties are generally liable for the borrowed amount. What distinguishes the two types of loan from each other is who will own the property and hold the legal rights to it.
“A joint loan is one in which both—or all—signatories receive the loan and will ultimately become owners of the property,” he explained. “Co-signing typically has a primary recipient and the co-signer(s) are basically just serving as guarantors of the loan.” In other words, co-signers don’t typically own the property.
And those differences also determine the roles played. If you get a joint loan, you’re a co-borrower, and Wilner says that you are required to make regular mortgage payments. “On the other hand, co-signers are normally not the ones making the monthly payments, but they are liable for paying back the loan if the primary borrower defaults on making payments,” she said.
The Pros & Cons of a Joint Mortgage
- Create a path to homeownership
- Build credit
- Pool resources to get better living arrangements
- May qualify for a larger loan amount
- One party’s situation may change
- Relationship may sour
- Others are legally responsible if one party doesn’t pay
- Late payments could ding credit score
For some people, a joint mortgage can open a previously unavailable path to homeownership. “The combined financial profiles of co-borrowers applying for a joint mortgage represent less risk for lenders,” Wilner said. This makes lenders more likely to approve the loan application.
In addition, she added that co-borrowing could result in a larger loan amount (so homebuyers wouldn’t have to get a smaller starter home). Co-borrowing might also lead to a lower interest rate than an individual would be able to obtain alone, Wilner said.
Plus, Dorn said that co-borrowing also can help the borrowers build credit. Payment history accounts for 35% of your FICO score, and a history of on-time mortgage payments plays a major role in establishing your reputation as a responsible borrower.
On the other hand, a joint mortgage could prove catastrophic if the situation with the co-borrower(s) changes for the worse. For example, one party’s situation may change. If they’re single, they may get engaged or married and decide they want to live somewhere else. Or if it’s a second home or an investment property, a change in marital status or a new baby may limit funds. Someone might lose their job, which could render them unable to make payments.
Something else to consider: The co-habitants’ relationship may go south. Whether a romantic relationship, familial, friendly, or work-related, one party may decide to end the connection. And if they’re not in a relationship with you, they may not want to be in a mortgage with you, either.
If the other party stops paying, you’re still legally responsible for the loan amount. Yes, they’re responsible, too, but the other person may not care as much as you do. For example, they may just move out and decide to let the bank repossess the home (or investment property). So you could be left scrambling to make full mortgage payments and avoid foreclosure.
Just one late payment could stay on your credit score for up to seven years. And a foreclosure could make it hard for you to buy or even rent in the future.
And speaking of late payments, even if the relationship doesn’t sour, how will you ensure that the other party makes payments on time? Can you cover the entire mortgage payment if their contribution is late?
“Anyone who combines their resources or obligates themselves on the loan to purchase a home needs to understand the risks before entering into such an agreement,” Wilner said. “Prior to entering into a loan agreement with multiple partners, it’s best for the parties involved to discuss the rewards and risks collectively to ensure everyone is on the same page.”
Dorn agreed and said each party is dependent on the other fulfilling their portion of the loan. “It requires a lot of trust and careful planning; legal agreements can help mitigate risks, but they don’t necessarily eliminate headaches.”
How To Get a Joint Mortgage With Friends or Family
The process of getting a joint mortgage is similar to getting a traditional one, except each party must qualify. Lenders will be looking at the following:
- Proof of income in the form of wages and assets
- Debt-to-income (DTI) ratio, or the percentage of your income that goes toward debt
- Credit scores, including payment history and credit utilization
- Work history that shows consistent employment
According to the Consumer Financial Protection Bureau (CFPB), lenders will usually use the joint borrower with the lowest credit score, but not their income, when evaluating the mortgage application.
“In some cases, banks also like to see a written agreement between the borrowers to ensure that there’s a healthy legal framework in place before the mortgage is approved,” Dorn said.
- A joint mortgage can help you qualify for homeownership.
- It may also allow you to get a better home or a larger mortgage amount.
- Borrowing jointly can help you build credit.
- Relationship changes may negatively affect a joint mortgage.
- You’re legally responsible if the other party doesn’t pay.