Joint Mortgages: Should You Get One?
When purchasing a home, applying for a joint mortgage could be the best option if both you and your co-borrower have good credit scores, clean credit histories and low debt. You could qualify for a large loan amount with a great interest rate and loan terms with your combined incomes.
What is a joint mortgage?
As the name implies, a joint mortgage is a home loan for multiple borrowers. This is a common practice for married and unmarried couples purchasing a house together. With a joint mortgage, all borrowers will occupy the home and be liable for the debt. This is different from a co-signer, who, while also liable for the debt, generally does not live in the home and may not be listed on the property title.
A joint mortgage differs from a mortgage for individual borrowers because it considers all the borrowers’ financial situations, instead of just one. For example, the combined incomes of the borrowers means you could qualify for a mortgage with a higher balance than if you tried to qualify on your own. Of course, it also means your mortgage application could get dinged if your spouse or significant other has less than stellar credit or owes a lot of debt.
Pros and cons of borrowing a joint mortgage
Applying for a joint mortgage can have many benefits and risks, all of which should be thoroughly evaluated before signing on the dotted line.
Pros
You could qualify for a higher loan balance. Because both incomes are evaluated in the loan application, you could be approved for a larger loan amount than you could if applying alone.
Your DTI ratio may be lower when combined with your borrower’s. As stated above, lenders like a DTI ratio below 43%, and combining your income and debts could lower your DTI ratio than if you applied by yourself.
Your clean credit histories will aid the credit decision process. If neither you nor your co-borrower have derogatory information on your credit reports, this will help smooth out the loan application process.
Cons
The lowest credit score of the borrowers will be used to determine the credit decision. If your co-borrower has a lower credit score than you, the lender will use it when evaluating your loan application. This could lead to problems qualifying for a joint mortgage.
Your DTI ratio may be higher when combined with your borrower’s. If your co-borrower has a lot of debt, this could increase your DTI above 43%, making it harder to qualify for a joint mortgage.
Both parties are responsible for repaying the joint mortgage — even if one person moves out. If you get divorced or break up with your significant other, both parties will still owe the debt. In a divorce, it’s important to lay out who’s responsible for the joint mortgage and get it in writing. Although this won’t remove your liability for the debt unless you refinance the loan to remove your name, you’ll have legal recourse if your former spouse fails to pay the loan as agreed. This may be more difficult if you aren’t married, so you should try to come to terms with your co-borrower to pay the joint home loan.
Who can apply for a joint mortgage?
While most borrowers can apply for a joint mortgage, married couples are the most common borrowers of a joint mortgage. Couples in committed relationships also often apply for a joint mortgage. Because young adults often haven’t yet established a strong or long credit history, or may not have sufficient income to qualify on their own, they may opt to apply for a joint mortgage with their parents. Close friends or siblings also may choose a joint mortgage, because it could be more affordable than buying or renting alone.
In most cases, joint mortgages involve two borrowers. However, depending on your lender, you may be able to have more than two. It’s important to talk with your lender to find out what the limitations are for the number of borrowers on a joint mortgage.
Whose credit score is used on a joint mortgage?
When applying for a joint mortgage loan, the lender will evaluate the borrowers’ credit scores and histories. For a conventional mortgage, borrowers should have a minimum credit score of 620. If applying for a Federal Housing Administration (FHA) loan, the minimum credit score requirement is 500 or 580, depending on the borrowers’ down payment amount. The higher the credit score, the better interest rates you’ll typically receive on the joint home loan. You can receive free copies of your credit report from all three credit reporting companies (Equifax, Experian and TransUnion) to review your credit history.
If your credit score is similar to the other borrower’s, both credit scores will be considered equal. However, if one credit score is lower than the other, lenders typically use the lower score when evaluating creditworthiness of the loan application. That lower credit score could lead to higher interest rates, more stringent private mortgage insurance (PMI) requirements and other difficulties in qualifying for a joint mortgage.
Joint mortgage requirements
The process of applying and qualifying for a joint mortgage contains several steps that all borrowers on a joint home loan will need to complete.
→ Collect your financial paperwork. You’ll need all the necessary paperwork showing your personal information, assets, employment information and income. This includes W2 or 1099 forms, tax returns, bank statements and retirement and/or investment account statements. If you’ve been divorced, pay or receive child support or have filed for bankruptcy, you should also provide statements to that effect.
→ Make sure you meet all the minimum mortgage requirements for a joint mortgage. Lenders will examine your income and debt to determine your debt-to-income (DTI) ratio — ideally, they’ll want to see a DTI ratio of no more than 43% — and also look at your credit score to see if it meets the minimum required by the loan type. In addition, lenders will want to know how much you plan to pay for your down payment and closing costs. Finally, they will review the loan-to-value (LTV) ratio for the home you plan to buy. This affects several loan terms, including the loan amount, interest rate and monthly payment.
→ Determine how much you want to spend on your joint mortgage. This goes beyond how much you qualify for on a joint home loan. Your lender may quote you a monthly payment that sounds affordable for your budget, but you’ll need to evaluate this cost with your other regular monthly expenses, such as groceries, gas, utilities, childcare costs and car or student loan payments. You want to have a payment you can comfortably pay each month.
→ Decide which joint mortgage loan is right for your needs. There are several mortgage programs, each with their own requirements and loan terms. It’s important to review each one to find the right joint mortgage for you and your co-borrower(s).
→ Choose a mortgage lender that best serves your needs. Today’s borrowers no longer have to rely on the bank up the street for a joint mortgage. Although these can still be a good source of a joint home loan, a mortgage banker or broker also could offer a favorable mortgage for you. Many online lenders also have access to good mortgage products that could be right for you. Take the time to research several of these to find the right fit.
→ Fill out your joint mortgage application. Once you’ve done your research and have all your documentation ready, you and your co-borrower are ready to start the paperwork. Many lenders allow you to complete a mortgage application online or even over the phone. Of course, you can still go old-school and complete a mortgage application in-person with your lender.
What rights do I have as a joint mortgage borrower?
Applying for a joint mortgage comes with several legal rights, which should be considered by all borrowers before you sign on the dotted line. These apply to your financial responsibilities as well as what actions to take to opt out of a joint mortgage before the loan is paid in full.
- You’re responsible for paying the mortgage as agreed. When signing onto a joint mortgage, you’re committing to pay the loan as agreed. Your financial responsibility for paying the loan won’t end until the loan is paid in full.
- If a co-borrower dies, the remaining borrowers are still responsible for the mortgage. All borrowers listed on the mortgage are legally responsible for paying the mortgage. This obligation doesn’t end if one of the borrowers dies. However, if the deceased borrower has heirs, you may need to decide if they receive any share of ownership in the property. These decisions should be made when signing a joint mortgage to avoid surprises later.
- If one borrower wants to sell, you may need to refinance or sell the home. If your co-borrower wants to sell the house but you don’t, you could agree to take over paying the mortgage yourself. However, if they want to be free of their obligation to pay the loan, you’ll need to refinance the loan in your own name. Alternatively, if you can’t qualify for a refinance, sell the home to pay off the loan.
- If a co-borrower wants their name removed from the loan, you must talk to your lender. Contact your lender and ask if they will remove the co-borrower from the mortgage. This is not likely however, unless you have excellent credit and the financial means to repay the loan by yourself. Still, it never hurts to ask.
How to get out of a joint mortgage
If you no longer want a joint mortgage, there are several options for getting out of the joint home loan that could work for you.
Refinance the mortgage in your co-borrower’s name
Refinancing a joint mortgage to remove one party means one borrower will need to apply for a new loan. The person retaining the home will need to meet the same mortgage requirements for a new mortgage that you had to meet for a joint home loan (this includes a minimum credit score, as well as the aforementioned DTI and LTV ratio requirements). In the event you both have equity in the home, the remaining borrower may need to apply for a cash-out refinance in order to pay you your share of the equity. A cash-out refinance has some different requirements that must be met for qualification.
See if you qualify for a mortgage assumption
Rather than applying for a mortgage refinance, a mortgage assumption means one borrower takes over responsibility for the monthly payments, interest rate and loan term for the existing joint mortgage — essentially, they keep paying the loan as originally agreed. However, it’s possible you could still be responsible for the debt if the other party fails to pay. To be free of responsibility, you need the lender to agree to a novation, which removes you from the joint home loan free and clear.
Sell the home, and pay off the joint mortgage
The simplest way to get out of a joint mortgage is to sell the home and pay off the existing joint home loan. This way, the loan is paid in full, and both you and your co-borrower are free to move on.