If you are worried you might not qualify for a mortgage large enough to buy a home, or be able to afford it, consider joining forces with friends or family to get a joint mortgage. Keep reading to find out what a joint mortgage is, the pros and cons, and whether it is right for you.
What is a joint mortgage?
A joint mortgage is exactly what it sounds like — a mortgage taken out by two or more individuals. The most common example is two spouses buying a house together.
However, you do not have to be married to opt for joint mortgage. Other situations where individuals opt for a joint mortgage include:
- Unmarried couples: It is common for two people in a relationship to buy a property together. This is particularly true when a mortgage may appear unachievable as individuals. By pooling their assets and incomes, an unmarried couple can increase their loan eligibility.
- Parent sand children: Parents often enter a joint mortgage agreement with their child to help them buy a house.
- Friends: Buying a house together with your friends can make better financial sense than renting a house. Depending on the house you buy, your joint mortgage installment might be lower than your monthly rental.
With a solo mortgage, only your name features on the application. As such, repaying the joint mortgage loan is completely your responsibility.
In the case of a joint mortgage, however, each borrower is legally responsible for repaying the home loan. For instance, if you and your partner enter a joint mortgage and the latter files for bankruptcy two years down the line, you will be responsible for paying the whole amount yourself.
Keep in mind that joint mortgages are different from joint ownership. Just because two people apply for a mortgage does not mean that both enjoy the ownership of the house. The opposite is equally true. It is possible that one of the two owners might not be listed on the home loan application.
For example, a parent may put their name on a joint mortgage application to help their child buy a home. However, this does not mean they will be automatically added on the home title and deed. Only those whose names are listed on these documents enjoy property ownership rights.
Alternately, a person who owns a house could put their spouse’s name on the deed after marriage. However, that does not mean the spouse will be legally responsible for repaying the mortgage.
Typically, people enter a joint mortgage to improve their chances of loan qualification.
With home prices being as high as they currently are, some individuals may find it hard to get approved for a home loan. Joining hands with someone with a better credit score or considerably higher income can increase their odds of qualifying. Besides this, would-be homebuyers also enter joint mortgages to score better terms on their mortgage and a lower interest rate.
Certainly, a joint mortgage can prove extremely helpful in some situations. However, there are also a few potential pitfalls that all homebuyers should be aware of before signing up.
How does a joint mortgage work?
When you take out a joint mortgage with another person or multiple individuals, all co-borrowers are legally responsible for repaying the loan. This means if one person stops making their share of the joint mortgage loan repayment, the lender can come after the other borrowers. For this reason, you should apply for a joint mortgage with someone whom you trust and who is fully invested in paying off their share.
When deciding the mortgage amount, interest rate, and terms, the lender considers the credit worthiness of each co-mortgagee. In other words, it will check the credit score and risk of each borrower separately.
If your co-mortgagee has a better credit history and higher annual income, that will improve your ability to get a favorable rate. However, if your partner has a poor credit score or a lot of debt, it can make the mortgage more expensive for you.
Each co-borrower will have to submit a separate application.The lender looks at the following details of each of you before making a decision:
- Credit score
- Employment history
If the loan is approved, you and your co-borrower will sign the promissory note. Each one of you is equally responsible for making down payments, although generally only one monthly payment is required. You can decide between yourselves who will be responsible for sending monthly mortgage payments.
How is my credit score affected?
When you apply for a joint mortgage with someone else, the lender checks the credit scores of both of you. Too many hard credit check scan pull down your score slightly.
However, since most lenders allow borrowers to get pre-approved without a hard inquiry, you can shop for the best joint mortgage without damaging your credit score.
Once you are approved, the joint mortgage will show upon each of your credit reports. Paying off the joint mortgage loan responsibly can help you improve your creditworthiness.
However, if you or your partner misses a loan of the mortgage payment, it can negatively impact both of your credit scores.
Differences between a solo and a joint mortgage
Here are the main differences between a solo mortgage and a joint mortgage:
Pros of a joint mortgage
Here are a few benefits that you get to enjoy when you enter a joint mortgage with someone else.
- Larger down payment
You need to make a down mortgage payment to secure a home loan. The minimum down payment for a mortgage in Canada is 5%. However, when the down payment is less than 20% of the purchase price, the homebuyer must buy the mortgage default insurance. It protects the lender if the latter defaults and is more expensive than private mortgage insurance. The lower the down payment, the higher the mortgage default insurance premiums.
If you buy a home with a partner or someone else, together you both might be able to put more than 5% down. As a result, you will be able to save on mortgage default insurance. And if you both are able to put more than 20% down, you can avoid it completely.
The other benefit of making a larger down payment is that you may qualify for a better rate.
- Better purchasing power
Entering into a joint mortgage can mean more buying power. Because more people (and consequently a higher aggregate income) are available to pay off the joint mortgage loan, you are likely to be approved for a higher loan amount when you apply with someone else.
- Possible better rate
If your co-borrower has impressive financial credentials, you may be able to qualify for a better rate than you would be able to get by applying solo.
- Shared responsibilities
Home maintenance is seldom cheap. Besides money, taking care of a home requires a lot of effort and time. Sharing this responsibility with a co-mortgagee can save you a considerable amount each month. You can slash the maintenance and repairs costs by half by sharing them with your co-borrower. Plus, this can give you some peace of mind knowing you do not have to do everything on your own.
Cons of a joint mortgage
Pooling your assets and income with a spouse, partner ,or friend can make a home more affordable, but it can also create complications. Here are the main pitfalls that you should consider:
- Interpersonal problems
Buying a home with someone you love and trust can help you qualify for a bigger home loan. However, things can get complicated if the relationship turns sour or one of you decides to move out. So, think things through before making such a big financial commitment with someone else.
- Repaying the loan
All borrowers in a joint mortgage are liable for monthly mortgage payments. If your co-borrower cannot afford to make their half of the joint mortgage loan down payment, the mortgage lender will come after you. The responsibility for paying off the entire mortgage payment will fall on your shoulders. Your credit score will also be impacted by your co-borrower’s inability or refusal to pay.
- Possible lower rate
You may have to settle for a higher rate if your co-borrower has a poor credit score or lot of debt.
- Ownership confusion
As mentioned earlier, joint mortgages do not mean joint ownership. You will have to make sure that your name is listed on the property deed and title.
- Co-mortgagee can sell
Even if you share ownership rights with your co-borrower, the latter can sell their ownership claim to another person or request the court to force a sale.
Should you get a joint mortgage?
Whether or not you should get a joint mortgage depends on several things. The most important factors to consider are your equation with the person with whom you are considering a joint mortgage and your co-borrower’s financial situation.
Additionally, consider the following factors before signing up.
What happens if one person wants to sell the home?
Purchasing a residential property together can expand your mortgage opportunities, but it can lead to complications later on. It is possible that one of you might want to sell the house in the future and the other does not. Have a frank discussion with your partner and make sure both of you are on the same page before applying. If you two are not in a joint mortgage agreement, entering a long-term binding agreement might not be a great idea.
You are liable for repaying the loan
You know you will keep your promise of repaying your half of the loan, but what about your co-borrower? Loss of employment or some other hardship may prevent your partner from repaying the other half of the mortgage. Do you have enough funds to pay off the entire loan yourself if this happens? Also, keep in mind that if your partner misses a monthly installment, both your credit scores will be affected. Make sure both of you have budgeted and a plan in place to ensure mortgage payments are made as per the schedule. Each party is liable for the entire mortgage amount, so if one co-borrower cannot pay, the mortgage lender will ask the other person to repay the loan in full.
What happens if one co-borrower passes away before the loan has been repaid?
Even if a co-mortgagee dies, the remaining person must continue to make monthly mortgage payment on time. The other issue is of who will get the deceased’s share. Depending on how the title has been written, the survivor may get the full ownership rights or the partial ownership may pass to the deceased’s heirs. Speak to a lawyer before signing the dotted line to ensure each of you understands the available options.
Other options to consider
Not sure if a joint mortgage is the right option for you? Here are some alternatives worth considering:
Have a close relative co-sign your mortgage
You can ask a co-signer to shore up weaknesses in your profile — like a poor credit score or a shaky employment history — and secure a larger mortgage and/or a lower rate. Your co-signer will be legally liable for the entire loan amount if you stop the monthly payments or pass away before repaying the mortgage in full. However, they are not likely to contribute to your down payment amount, nor will they pay house maintenance and repair bills.
The first-time home buyer incentive
If you are first-time home buyer, this incentive program is worth considering. By lowering your monthly mortgage installment, it makes it easier to buy a home. The federal government allows you to borrow up to 10% of purchase price of the property. However, it is not always the right option, so do a thorough research first.
Purchase a cheaper home
You can consider buying a cheaper home if a joint mortgage does not work for you. Another option is to postpone buying until you have saved a larger down payment. Saving can help you qualify for a lower rate, get a bigger loan, and reduce the cost of default mortgage insurance.
How to terminate a joint mortgage
A joint mortgage is not an until-death-do-us-part agreement. You can get out of a joint mortgage if you want. Here are three main options available to you.
Pay the loan off
One way to terminate a joint mortgage is to pay the loan off early. However, realistically speaking, this will not be an option for most people because it means coming up with a huge chunk of money. But if you have the funds, repaying the joint mortgage loan early and in full can help you keep the home with no mortgage.
Sell the home
If all the involved parties agree, selling the property is an option worth considering.
Refinance the loan
Refinancing the joint mortgage can help remove your name from it. Of course, you will have to forgo your share of ownership of the property.
Thanks to rising property prices, joint mortgages are more common today than ever before. Combining your financial might with others can help you access a larger loan amount, make a bigger down payment, and lower the interest rate. However, buying a home with others is a big commitment. You should consider all eventualities carefully before reaching a decision.