Experts believe that now is a good time to apply for a mortgage since interest rates are low. But what happens when you can’t even raise enough down payment or have a thin credit history and poor credit score?
They can look for a mortgage lender with conventional home loans who can permit a joint mortgage. Here’s how it works.
What Is a Joint Mortgage?
A joint mortgage is a type of loan where more than one person takes it out. In other words, the responsibility of paying it off belongs to all parties signing the mortgage agreement. The mortgagees can be any partnership, such as parents and child, couples, and even friends and colleagues.
Some people confuse it with joint ownership, which implies that at least two people own the property. This type of mortgage doesn’t consider ownership. Rather, it focuses on who pays the debt. Thus, in this arrangement, all parties may end up paying for the loan, but only one of them may appear on the contract or the property’s title.
Parties can also consider different ways on how to do a joint mortgage. One of the most common is joint tenancy, where all parties have equal rights to the property if they decide to sell it. If one of them eventually dies, the other takes ownership of the entire right or share.
There’s also the tenancy in common, where all mortgagees will have different percentages of the share to the property. The division may be based on the deposit or down payment. For instance, those who have contributed the biggest may also receive the largest property right or share.
If one or more people decide to move on, perhaps transfer to another house or take out a mortgage on their own, they can sell these shares to the others. This way, the house is still theirs. The person who left no longer has any interest in the property, but they also won’t be burdened by contributing to the repayment.
What Happens When One Mortgagee Defaults?
Lenders will hold the remaining owners responsible if someone breaks a contract. If a single borrower fails to keep up with payments or various other obligations under a joint mortgage agreement, the lender can pursue legal action against that individual and/or make arrangements with another owner who is willing to take over some or all of the loan’s obligation in exchange for ownership of part or all of the property.
In this case, it may be necessary to foreclose on one (or more) parties involved for everyone to avoid defaulting on their loans, even though they might not have been responsible for the defaulting party’s missed payments.
All participants in a joint mortgage should remember that the loan will appear on all of their credit reports. This means that the default of one can impact the credit score of others. On the upside, if two have impressive credit scores, while the other has a fair credit score, they may still receive a good payment term from the lender.
Advantages of Taking Out a Joint Mortgage
Despite the risks, homebuyers may still consider a joint mortgage because it can offer the following benefits:
- Lenders are more comfortable with joint mortgages as it is easier to track and supervise payments, especially when only one borrower has credit standing.
- If there are multiple owners in the property, all will be equally responsible for any missed payments. This could resolve a burden on someone’s personal finances if they covered their own mortgage and a rental home for other people.
- Joint ownership means everyone contributes to and shares in the costs of owning a home, building equity, repairs, and renovations. This could save individuals money by reducing expenses associated with owning real estate, such as maintenance, property taxes, etc. They can share the cost for renovations and improvements by taking on each other’s debt load to generate equity to pay off their loans at a faster rate.
- In some cases, joint mortgages may expand an individual’s access to credit. For example, if an owner has a lower or less secure personal credit rating, they would not qualify for financing as an individual. Still, they could be added to a higher-interest-rate mortgage with multiple owners in the same property.
Not all lenders may be open to a joint mortgage, and not all homebuyers find this setup comfortable. But if you like to be more practical about your mortgage spending, this arrangement is something you can consider.