We tend to think of property ownership in binary terms: You either own it or don’t. But in reality, ownership can take many forms based on the type of title a person holds. A title is a legal document that specifies who owns a specific property. While a title can stipulate that an individual has sole ownership of a property, it can also indicate that a property is co-owned.
There are a variety of co-ownership arrangements – like tenancy by entirety and tenancy in common – but one prevalent method of holding a title is joint tenancy. Anyone interested in co-owning property should understand this type of ownership agreement, as it can significantly benefit home buyers, especially those who don’t have the means to purchase property independently. Read this article to learn the intricacies behind joint tenants’ ownership rights, how this arrangement differs from similar options and what pros and cons to expect from this type of agreement.
What Is Joint Tenancy?
Joint tenancy is a co-ownership arrangement in which two or more individuals hold a title to a specific property. While joint tenancy can apply to personal property, bank and brokerage accounts and business ownership, it’s most commonly used for investments in real estate.
When purchasing property, joint tenancy provides all parties with equal rights to and responsibilities for the real estate purchased. Although joint tenants receive the same amount of interest in the property, there are limitations to how they can use their shares. Perhaps the most critical condition of this type of ownership is the fact that it includes the Right of Survivorship, which precludes co-tenants’ heirs from inheriting their shares of the property.
How Are Joint Tenancy Agreements Made?
Joint tenancy agreements can be entered into by nearly anyone: Married or unmarried couples, family members, investment partners or friends. However, for a joint tenancy agreement to be made, certain conditions must be met. All co-tenants must acquire equal shares of the property through the same deed at the same time.
With their equal interest, joint tenants also share equal financial responsibilities for the property, meaning all co-tenants are liable for any loans taken out against the property. Similarly, a co-tenant may not sell their shares of the property without the consent of all other tenants.
In lieu of selling, a joint tenant can transfer their shares to another person. However, transferring shares terminates the joint tenancy agreement, forcing the new co-owner to enter a new ownership arrangement with the remaining co-tenant(s). The new arrangement, known as tenancy in common, will be discussed in more detail in the next section of this article.
Joint tenancy agreements also come with the Right of Survivorship. This inclusion ensures that when a joint tenant dies, their shares automatically transfer to the surviving co-tenant(s). Regardless of what’s stated in the deceased’s will, shares of the co-owned property cannot be passed down to their heirs. Therefore, the property does not go through probate, and the surviving co-tenant(s) immediately gains the deceased’s interest in the property, as well as all mortgage responsibility. However, after the last living co-tenant becomes the sole owner of the property, they may include the property in their will and bequeath ownership to their heirs.
Joint Tenancy Versus Tenancy In Common
Joint tenancy is similar to another common co-ownership arrangement: tenancy in common. These two title methods may sound nearly identical; however, there are key differences that must be understood before deciding between them.
Tenancy in common is not as rigid in its stipulations. While joint tenants must obtain equal shares of the property through the same title at the same time, tenants in common can split their interest however they like and enter into the agreement at any time. Financial responsibility is also more lenient with tenancy in common. Although joint tenants are equally liable for all debts against the property, tenants in common can use their own shares as collateral and take on sole financial responsibility for loans.
There is also more flexibility when it comes to unloading the property. Unlike joint tenancy, tenancy in common enables co-tenants to sell their interest in the property without consent. Furthermore, tenancy in common doesn’t include the Right of Survivorship, so co-tenants can pass the property down to their heirs through their wills.
Benefits Of Joint Tenancy
Joint tenancy provides a more accessible entry into homeownership for first-time home buyers and those interested in investing in real estate. The most significant benefit of joint tenancy is that it makes homeownership more affordable. Joint tenancy enables co-tenants to split the down payment and provides them with an advantage when it comes to qualifying for a mortgage.
Typically, borrowers must have a credit score of at least 620 and a debt-to-income ratio below 50% to qualify for a conventional loan. But when applying for a mortgage as a joint tenant, co-tenants can combine their income and debts to increase their chances of qualifying. So, as long as each co-tenant has a strong credit score, they generally have an easier time meeting the DTI requirements and can even be approved for a lower interest rate.
Joint tenancy also ensures that co-owners are able to share all responsibilities for paying off debts, maintaining and improving the property and renting it out (if the property is used to generate rental income). The fact that co-tenants possess equal shares of the property gives every party incentive to do their part to protect their investment.
Since joint tenancy includes the Right of Survivorship, co-tenants also benefit from the ability to avoid probate, the lengthy legal process that the court system uses to validate wills. Instead of having to go through probate, the surviving co-tenant(s) has immediate access to their shares of the property regardless of whether the deceased had written out a will.
Drawbacks Of Joint Tenancy
The rigid conditions of joint tenancy may protect you in the event that your co-tenant(s) attempts to take advantage of your investment. Still, those same conditions can make it challenging for you as well. If a co-owner loses their job or runs into financial difficulties, the other parties involved in the agreement are responsible for continuing to make all mortgage payments and preventing the property from going into default.
If a change occurs in the relationship between joint tenants, difficulties can also arise. Since all decisions regarding the property must be made jointly, it can be challenging to navigate disagreements. No one can sell their shares of the property without the express permission of all other co-tenants. And, with the Right of Survivorship, it is only the last living co-tenant who has the ability to pass the asset onto their heirs.
Although some married couples choose to hold property titles as tenants by entirety – a type of title that provides each spouse with full interest in the property – couples who decide to hold joint tenancy titles can run into issues if their marriage dissolves. Joint tenancy can add tension to legal battles, and regardless of whether the couple chooses to undergo divorce, each spouse will still be held accountable for all debts.
Joint tenancy is a co-ownership arrangement that provides all parties with equal interest in and responsibility for the real estate purchased. Although this title structure can aid individuals in qualifying for a mortgage and purchasing property earlier in life, it’s crucial to think carefully about with whom you enter the relationship. Remember, if the property is used as collateral for any loans, all parties are held liable for paying off the debt. So make sure you have complete trust in your investment partners.
If you’re interested in learning more about homeownership or the intricacies of the mortgage process, check out other articles in the Rocket Mortgage® Learning Center.
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