When it comes to ownership in real estate, there are three basic ways for individuals to own a property: sole ownership, jointly with others, and as tenants in common. The type of ownership determines the rights of the individuals named on the deed to sell or will their investment in the property, and to dissolve the tenancy. But what is a joint tenancy, how do they work, and what should anyone pursuing one need to know? Let’s talk.
What is Joint Tenancy?
Joint tenancy is a specific type of ownership in which two or more parties have equal rights to, shares of, and responsibilities for property. For example, this type of legal agreement can be used by married or unmarried couples, relatives, business partners, or close friends. Unlike other co-ownership arrangements, joint tenancy includes the Right of Survivorship: this prevents interest in the property from being inherited by co-owners’ heirs.
How Does Joint Tenancy Work?
At the beginning of the joint tenancy, all parties must enter the co-ownership agreement at the same time and through the same deed. The deed will specify that joint tenants own equal amounts of interest in the property and are therefore equally liable for it financially. Additionally, since the joint tenants have equal interest, the property cannot be sold without the consent of all parties. Instead of selling, a joint tenant may choose to transfer their stake in the property to another party. When the interest is transferred, the new party may elect not to enter the joint tenancy. In this case, the joint tenancy agreement is terminated, and the new individual must enter a new co-ownership arrangement, known as “tenancy in common,” with the remaining tenant.
Pros and Cons of Joint Tenancy
Although there are benefits to joint tenancy, there are certain drawbacks that can complicate the investment. When deciding whether to enter a joint tenancy, it’s very important to have a thorough understanding of the pros and cons involved in the arrangement.
Joint tenancy can make homeownership more affordable for those who may not have the funds or credit to qualify for a mortgage and purchase a home by themselves. For a conventional loan, borrowers typically need a credit score of at least 620 and a DTI below 50% to qualify. When seeking to purchase a property as a joint tenant, co-tenants still need a high credit score; when it comes to DTI, however, the income and debts of all co-tenants are combined, potentially making it easier to get a mortgage and at a lower interest rate.
Unforeseen life changes can bring about major complications in the co-ownership structure. If a co-tenant runs into financial trouble after purchasing the home and cannot afford to keep up with their share of mortgage payments, the other co-tenant(s) is still responsible for preventing the property from going into default. If a married couple decides to purchase a home as joint tenants, divorce or separation can complicate this. Divorced couples are still responsible for their former partner’s share of the debt, and neither party can decide to sell the property without the other’s expressed permission. Also remember, with the Right of Survivorship, inheritance can be a major issue. Regardless of the deceased’s will, their shares will automatically be bestowed upon the surviving co-tenant(s).