What Is Joint Tenancy?
As you review the steps involved in buying a house, you may wonder if your finances are up to snuff. Even if your credit score is sufficient to qualify for a mortgage, saving for a down payment and closing costs can be a challenging and lengthy process.
If you’re looking to lighten the financial load, it might be a good idea to consider purchasing property with another person under joint tenancy. Buying a house with someone can enable you to become a homeowner earlier in life – though shared ownership of a property can sometimes be tricky to navigate.
In this article, we’ll explore one of the most common co-ownership structures – joint tenancy – and the various advantages and disadvantages that come with it.
Joint Tenancy Definition
Joint tenancy is a type of ownership in which two or more parties have equal right to, share of and responsibilities for a piece of personal or real property.
This type of legal ownership agreement can be utilized by unmarried or married couples, relatives, business partners or close friends. Unlike other co-ownership agreements, joint tenancy includes the right of survivorship, which prevents interest in the property from being inherited by co-owners’ heirs.
Joint tenancy arrangements can be applied to the ownership of a variety of different assets, including real estate, personal property, business ownership, and banks and brokerage accounts – but generally people think of it in relation to buying a house.
How Does Joint Tenancy Work?
To begin joint tenancy, all parties must enter the co-ownership agreement at the same time through the same deed. The deed specifies that the joint tenants own an equal amount of interest in the property and are therefore liable for it financially.
Since the joint tenants have equal interest, the property cannot be sold without the consent of all parties. Instead of selling, a joint tenant can choose to transfer their interest to another party. But it’s important to note that when interest is transferred, the new party may not enter the joint tenancy.
Instead, 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.
Joint Tenants With Right Of Survivorship (JTWROS)
Unlike other co-ownership structures, joint tenancy arrangements include the right of survivorship. A joint tenancy with right of survivorship (JTWROS) means that if a joint tenant dies, the surviving owner(s) automatically gains ownership of the property – so the property can’t be passed down to the heirs of the joint tenants.
This aspect of the co-ownership arrangement is somewhat unusual, as typically the deceased’s will must go through probate, a process in which an individual’s will is validated by the court system. If all joint tenants die, the property will go through a probate sale to determine who the new legal owner should be.
Joint Tenancy Vs. Tenancy In Common
Joint tenancy isn’t the only way that two or more individuals can jointly own property. Depending on the circumstances and the relationship between the parties involved, individuals may instead wish to enter a tenancy in common agreement. Although these two terms sound similar, there are important distinctions between them.
While joint tenancy means that all tenants possess equal ownership of the property, a tenancy in common agreement allows for interest to be split into different percentages. For example, let’s pretend you purchased a property with two friends. You own 50% of the property, while each of your friends owns 25%. Despite the difference in percentage owned, you would all have a claim on the property, meaning no individual can claim ownership over it.
Tenancy in common also allows co-owners to sell or transfer their share of the property without the other tenants’ consent. This means heirs may inherit the deceased co-owner’s shares in the property after they pass.
Joint Tenancy Vs. Community Property
Following a contentious divorce, all assets must be divided. In an effort to simplify this process, certain states have put community property laws into place. In a community property state, all the marital assets are considered jointly owned and must be jointly split in the event of a divorce. This includes real estate, personal property, savings, retirement accounts and debts acquired during the marriage.
Both joint tenancy and community property come with the right of survivorship, but with community property, spouses are unable to pass on their interest in the property to someone other than their spouse. The community property structure is only available to married couples.
Advantages Of Joint Tenancy
Before entering a legal agreement, it’s important to understand all the fine print – so when you’re deciding whether a joint tenancy agreement is right for you, you should consider all the pros and cons involved.
Let’s start with the pros:
Joint tenancy can make homeownership a more affordable option for those who may not have the funds or credit necessary to qualify for a mortgage and purchase a house on their own. To qualify for a conventional loan, borrowers typically need a credit score of at least 620 and a debt-to-income (DTI) ratio below 50%.
When buying property as a joint tenant, co-tenants still need to have a high enough credit score, however the income and debts of all co-tenants are combined to determine the DTI, which can make it far easier to obtain a mortgage and secure a lower interest rate.
Owning real estate isn’t easy, but joint tenancy minimizes the headaches involved in homeownership. All the responsibilities and financial burdens involved can be a lot to handle on your own, but with a co-tenant, all obligations are equally divided and therefore significantly more manageable.
Right Of Survivorship
Joint tenancy enables individuals to avoid the lengthy process of probate should their co-owner pass away. Probate avoidance means that assets are immediately distributed to the living co-owner, even if the deceased did not have a will written out before the time of death.
Dangers Of Joint Tenancy
Although there are quite a few benefits to being a joint tenant, there are certainly some drawbacks that can complicate your investment.
Let’s look at the cons:
Life changes can greatly complicate this co-ownership structure. If a co-tenant runs into financial troubles after purchasing the home and cannot afford to keep up with their share of mortgage payments, the other co-tenant(s) is responsible for preventing the property from going into default.
Divorce Or Separation:
If a married couple decides to purchase a home as joint tenants, the event of their divorce or separation could further complicate any future legal battles. A divorced co-tenant is still responsible for their former spouse’s share of debt, and neither party can decide to sell the property without the express permission of the other.
Remember, with the right of survivorship, inheritance can be a major issue with joint tenancy. Regardless of the deceased’s wishes or will, their shares will automatically be bestowed upon the surviving co-tenant(s). Therefore, co-tenants are helpless when it comes to passing their shares onto their heirs.
FAQs About Joint Tenancy
With so much to consider, it’s understandable to have questions about co-ownership arrangements. The following are a handful of the most frequently asked questions regarding joint tenancy.
Should a married couple be joint tenants or tenants in common?
Both married and unmarried couples can enter co-ownership agreements. Both types of co-ownership have pros and cons, so deciding between joint tenancy and tenancy in common will ultimately be a task for you and your partner.
However, joint tenancy can be beneficial as it ensures both partners have equal rights to the property, and if one owner dies, the co-owner automatically receives their share of the home.
Can a parent and child be joint tenants?
It’s not uncommon for parents to add their adult children as joint tenants on a property to ensure that property passes from the parent to the child at the time of the parent’s death.
But although this is one way to ensure the right of survivorship, it’s not the only way – and it can lead to potential problems down the road.
For example, the IRS limits the amount of money that can be gifted from one person to another within a calendar year. If your child is afforded half ownership of your home and the half interest in the property is worth more than the IRS gift limit, you will be subject to gift taxes.
This is just one of several issues you could experience when adding a child to your title, so we recommend speaking with an estate planning attorney to determine which option makes the most sense for your situation.
What happens when joint tenants separate?
When joint tenants separate, deciding what to do with the shared property can be challenging. All decisions on the property must be made jointly, which can add tension to already difficult legal battles. In this situation, one co-tenant can pass their share in the property to the other, or both tenants can choose to leave the home.
The Bottom Line
Joint tenancy is one type of co-ownership that can enable you to purchase real estate sooner, but it’s important to keep in mind that this means sharing the property and all the responsibilities that come with it.
With equal interest in the property and equal responsibility for debts, it’s crucial that you fully trust the individual(s) with whom you enter a joint tenancy agreement.
Ready to take the first step in your home buying journey? Apply online with Rocket Mortgage® for a free preapproval.