When looking at all the steps involved in buying a home, you might ask yourself whether your finances will suffice. Even with an excellent credit score, saving money for a down payment and closing costs can get complicated.
For this reason, many people opt for buying a property with another person under joint tenancy as this way they share the financial responsibilities. Purchasing a home with someone can allow you to become a homeowner earlier than you would on your own. However, sometimes shared ownership of a house can be tricky to navigate.
Here, we discuss joint tenancy, how it works, and its pros and cons to help you decide whether this financing option might suit you.
Joint tenancy refers to ownership where two or more parties enjoy equal rights to share and responsibilities for personal or real property. This legal ownership agreement can be used by both married and unmarried couples, relatives, close friends, and business partners. Note that joint tenancy differs from other co-ownership agreements as it includes the right of survivorship which prevents interest in the property from being inherited by the co-owners' heirs.
While joint tenancy can apply to the ownership of various assets, such as personal property, real estate, business ownership, and banks and brokerage accounts, people generally think of it in relation to purchasing a home.
One of the main features of joint tenancy is the right of survivorship - if one of the owners dies, the other owner or owners get their share.
Each co-owner has equal rights to use and enjoy the property. However, specific requirements must be met for this to happen. Joint tenancy typically requires time, interest, possession, and title, meaning that the owners have to become joint tenants in the same instrument or deed at the same time. Moreover, they must have an equal ownership interest and take possession of the property at the same time.
All parties have to enter the co-ownership at the same time through the same deed to begin joint tenancy. The deed indicates that the joint tenants own an equal amount of interest and are financially responsible for it. Moreover, each tenant shares the responsibility of paying for the mortgage and property taxes.
Because the joint tenants have equal interest, the property can’t be sold if one party doesn’t consent. However, a joint tenant can choose to transfer their interest to another party instead of selling.
Even so, the new party may not enter the joint tenancy when the interest is transferred. Instead, the joint agreement is ended, and the new party has to enter a new co-ownership arrangement with the remaining tenant, known as the tenancy in common.
As you know by now, joint tenancy isn’t the only way that two or more people can enjoy shared ownership of a property. Depending on the relationship between the parties involved and other circumstances, they may choose to enter a tenancy in common agreement instead of a joint tenancy. While these two terms sound similar, there are several vital differences between them.
With the joint tenancy, all parties have equal ownership of the property. On the other hand, with the tenancy in common arrangement, the interest can be split into different percentages. Let’s say you bought a house with two relatives where you own 40% of the property, and they own 30% each. Even though you own more, all three of you would have a claim on the property. This means no party can claim ownership over it.
Moreover, tenancy in common allows co-owners to transfer or sell their share without the consent of other tenants, meaning heirs can inherit the shares of the deceased co-owners in the property after they die.
Joint tenancy with right of ownership (JTWROS) is popular among married couples. Here’s why - in JTWROS, if one owner passes away, their share automatically goes to the other owner or owners, meaning a widowed spouse can remain in the house with full ownership and no legal fights.
That said, JTWROS allows the property to bypass probate and pass directly to the surviving owner or owners. Skipping probate is particularly important if one of the tenants needs to use the property continually as their residence or keep a business going. The survivor will only have to deliver the proof of the JTWROS and a death certificate or other proof of death of the deceased to remain on the property.
Sharing ownership in joint tenancy has several benefits, including:
If you don’t have the funds or credit score required to qualify for a mortgage and buy a home on your own, joint tenancy can make homeownership a more affordable option. Typically, you will need a credit score of at least 620 and a debt-to-income ratio below 50% to qualify for a conventional loan.
With joint tenancy, co-tenants still need a good credit score, but the income and debts of co-tenants are combined to calculate the DTI, making it easier to get a mortgage and secure a lower interest rate. Besides that, all obligations and financial burdens are equally divided and, therefore, more manageable.
Joint tenants are typically entitled to a share of the rents and profits the property receives in case of renting.
As we mentioned, joint tenancy enables the survivor tenant to obtain the deceased share at the time of death. The process of transferring property is usually automatic and requires little to no paperwork.
While joint tenancy offers many benefits, it does come with several drawbacks too, such as:
Sometimes, one of the joint tenant’s creditors can force a property sale for the said tenant to pay off a debt. This would leave the other joint tenants vulnerable to such risk even if they didn’t benefit from the other tenant’s debt.
Joint tenants don’t have the right to transfer their share of the property after their death. Instead, they stop owning their portion of the said property, even if their will states otherwise.
With joint tenancy, one tenant must get permission from the other joint tenants to make vital decisions regarding the property. For instance, they may need a permit to obtain a mortgage on the house or transfer their share to someone else. This can be challenging if joint tenants disagree or don’t get along.
However, an individual may petition a court to partition the property by forcing a sale or physically separating the property. This way, the property would no longer be owned in equal shares.
If a married couple buys a house as joint tenants, their divorce or separation could complicate future legal battles because a divorced co-tenant is still responsible for their former spouse’s share of the debt. What’s more, neither party can sell the property without the permission of the other.
Joint tenancy can allow you to buy a property sooner and have an easier time regarding financial obligations. However, this means you will be sharing the property and all the responsibilities that come with it with one or more individuals. That’s why it’s important to fully trust the people with whom you enter a joint tenancy agreement.
If you want to buy a new home with other individuals as joint tenants and have an old house to sell, consider selling it to SleeveUp Homes. We’ll buy it as is for top dollar, which can help you save money for a down payment for your new home in no time. But don’t take our word for it - request a no-obligation cash offer, and see for yourself!
If you want to sell fast and are worried about how long the traditional process takes, and the commission and fees involved, consider working with SleeveUp Homes.