Traditionally, the most common types of homeowners were either married couples or single individuals. However, it’s not out of the ordinary for friends or family members to purchase a property together, and as an extension, apply for a joint loan to help them do so.
Why Do People Get Joint Mortgages?
There are a number of reasons why people might decide to go for joint mortgages. Shared housing might not be a traditional choice, but it can make sense to a lot of people. Aaron Dorn, chairman, president, and CEO of Studio Bank in Nashville, Tennessee, told The Balance, “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.”
Here are some of the main reasons why people get shared housing:
To Build Family Homes
Joint mortgages are also becoming popular among families as they invest in not just themselves, but the future of their children as well. “As people are living longer and pensions are going away, multigenerational housing is becoming commonplace once again,” Dorn said.
At the same time, it’s not just traditional families who go this route. For instance, an unmarried couple who plan on building a future together may want to get a head start on that by purchasing a home together.
To Lower Their Cost of Living
Another situation in which a joint mortgage could make a lot of sense is when friends who are living together in a rented house may decide on shared homeownership as it could result in lower monthly payments. Shared housing is generally a great idea for those who find they cannot afford a house on their own. By pooling their resources together with 2 or 3 others, it can fit into their budget easily.
To Invest in Income Generation
Real estate is one of the oldest forms of investment that helps generate income, and it remains to be one of the best ways to invest to this day. However, not everyone can afford to buy homes or properties by themselves.
“Some people could be pooling their resources to purchase an investment property, which will be used to generate additional income,” Wilner said. And in such an instance, rental amounts collected monthly will typically go towards paying off the mortgage.
To Make Vacation Homes More Affordable
Another scenario where a joint mortgage might make sense is if it’s a property that you do not plan to use throughout the year. “Some people have a secondary residence—like a vacation home—where they live part of the year,” said Melinda Wilner, chief operating officer at United Wholesale Mortgage in Detroit. It would make sense to have a place to stay “free of charge” if you happen to frequent that location for extended periods of time instead of shelling out thousands on hotels or rentals. Plus, it’s a lot safer as well.
Is a Joint Loan the Same as Co-Signing?
The short answer is “no”.
The main difference between a joint loan and co-signing is regarding who is liable to pay back the borrowed amount, i.e., make monthly mortgage payments, as well as 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,” says Dorn. “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.
This means that when you have a joint loan, you become a co-borrower, and are liable to make monthly loan payments along with all your other joint borrowers. On the other hand, a co-signer isn’t required to make regular payments. It’s the primary borrower who is responsible for that. A co-signer serves as sort of a guarantee that the primary borrower will make the payments and does not hold rights to the property in any way. However, if in case the borrower fails to fulfill his obligations, the co-signer will have to take up the responsibility of paying back the loan.
How To Get a Joint Mortgage with Friends or Family
Getting a joint mortgage is pretty similar to getting any other type of loan; the only difference is that every person listed on the loan must go through their own vetting process. Traditionally, lenders require documents such as:
- Proof of income (wages, assets, etc.)
- Work history to establish a pattern of consistent employment
- Credit scores, payment history, and credit utilization
- Debt-to-income (DTI) ratio – the percentage of your income that goes towards debt
The Consumer Financial Protection Bureau (CFPB) says that lenders typically use the joint borrower with the lowest credit score, but not their income, in the evaluation process of a joint 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.
The Pros & Cons of a Joint Mortgage
Here are some of the main advantages of a joint mortgage:
Make Homeowning a Possibility
The main advantage of a joint mortgage is that it makes homeownership more affordable for those who might not be able to buy one otherwise. There are also other advantages like being able to afford a bigger, better home instead of picking the cheapest option available, and also qualifying for a lower interest rate by going for a larger loan amount than an individual could have afforded on their own.
Lenders also see joint mortgages as less risky due to the involvement of multiple parties, and therefore, are more likely to approve the mortgage application. “The combined financial profiles of co-borrowers applying for a joint mortgage represent less risk for lenders,” Wilner said.
Better Quality of Life with Lower Costs
When going for a joint mortgage, you and your co-borrower will pool your resources together to arrive at a budget that is much larger than either one of you could afford individually. This way, you can look for homes that are better in quality, amenities, have better facilities, etc.
By signing up for a joint mortgage, you can look forward to a better quality of living space and as an extension, better quality of life. And since there is more than one person responsible for paying the mortgage every month, your individual mortgage rate will also be much lower.
Helps Build Credit
According to Dorn, being a co-borrower will also help you build up credit as payment history accounts for 35% of your FICO score. On-time mortgage payments will help you establish a good payment history and seal your reputation as a responsible borrower.
The Cons of a Joint Mortgage
As with everything, there are two sides to the coin. Here are some of the dangers of signing up for a joint mortgage.
Changes in Life
Signing up for a loan is always a gamble. You hope that your financial situation won’t take a downturn in the future, but nothing is certain. Even life circumstances such as getting married, a growing family, losing a job, having to move, etc. are things that impact a pre-existing mortgage loan.
While all of these are risks involved with any type of loan, they are exasperated when it comes to a joint mortgage because there are multiple parties involved and any one of them could have a change of lifestyle or even just a change of mind. Such an instance can prove to be quite tricky to navigate.
You May Have to Take on More Than You Signed Up For
When you sign up for a joint mortgage, each party is dependent on the others to fulfill their portion of the loan. If the primary reason you chose a joint loan was that you could not afford to get one on your own, you may be left scrambling if the other person fails to make their payments on time. Plus, a single late payment stays on your credit history record for seven years!
“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 says that while there are some contingencies to put in place to protect yourself, it ultimately comes down to “ trust and careful planning”. “Legal agreements can help mitigate risks, but they don’t necessarily eliminate headaches,” he explained further.
Puts Pressure on Your Relationship
Speaking of one or more of your co-borrowers being unable to make payments, another thing to consider is that involving finances in any relationship is bound to put pressure on it. There is a risk of your relationship turning sour, whether it be romantic, familial, or friendly, due to financial pressure. On the other hand, a number of other reasons could also result in the breakup of your relationship. A falling out could cause them to move out and then they won’t be bothered to pay the mortgage either because they do not care what happens to the property.
If this happens, then the burden of paying back all of the loans will fall onto you. Legally, it’s not just your portion of the loan you are liable for but the entire amount. Failing to make payments could result in repossession by the bank or even a foreclosure!