With a hot real estate market and rising property prices (especially in major cities) it’s becoming increasingly harder for Canadians to afford to buy a home. Buying a house together with someone else using a a tenants-in-common mortgage could be a smart solution. Read on to see if it’s the right option for you.
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Purchasing a home with others as tenants in common and getting a mortgage loan together can be a great way to achieve homeownership. However, there are some important things to understand about how tenancy in common works when taking out a mortgage loan. In this comprehensive guide, we’ll cover everything you need to know about getting a mortgage as tenants in common.
What is Tenancy in Common?
Tenancy in common is a form of shared property ownership between two or more people. Each owner has a divided interest in the property and can own unequal shares. For example, I could own 50% of a property while my friend owns the other 50%. Or perhaps I own 60% and two other people each own 20%.
The key distinguishing factor of tenancy in common is that each owner has the right to sell, transfer, or mortgage their share of the property independently without the consent of the other owners. When an owner dies, their interest passes to their heirs – it does not automatically transfer to the surviving owners.
Tenancy in common provides more flexibility compared to other forms of co-ownership like joint tenancies. It’s commonly used by friends, partners and investors who want shared ownership without survivorship rights.
Getting a Mortgage Loan as Tenants in Common
When getting a mortgage loan as tenants in common there are a few key things to keep in mind
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All owners need to be on the mortgage – Even if one owner has greater financial means, the lender will require all co-owners to be jointly obligated for the mortgage loan.
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Income requirements are based on all owners – The lender will assess the combined income, assets, debts, and credit scores of all co-owners to determine eligibility and pricing. Each person needs to meet underwriting requirements.
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Ownership percentage affects down payment – If there are 3 owners with 50/30/20 shares, the down payment can reflect those percentages. But the loan amount and monthly payments will be based on 100% ownership.
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All take equal responsibility – Even if one person puts up most of the down payment, all owners must sign the mortgage note and share equal responsibility for making timely payments.
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Refinancing requires everyone – To refinance or modify the mortgage later, participation from all original borrowers is needed. The lender won’t allow a partial refinance for certain owners.
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Selling requires coordinated effort – If one owner sells their interest later, the buyer needs to be approved by the lender and added to the mortgage. The remaining owners can’t simply remove a person.
Finding the Right Lender
Not all mortgage lenders are experienced with tenancy in common loans. Here are some tips for finding one who understands this type of ownership:
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Ask friends for referrals to lenders who have handled TIC loans before.
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Search online for lenders familiar with tenancy in common financing.
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Look for local lenders instead of big banks – smaller lenders tend to be more flexible.
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Explain upfront you are seeking a mortgage as tenants in common so they understand the situation.
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Ask detailed questions to gauge their knowledge of TIC lending requirements.
Going with an experienced lender from the start can help avoid headaches and ensure a smooth underwriting process.
Applying for a Tenancy in Common Mortgage
When applying for a mortgage as tenants in common, there are a few additional requirements compared to a standard loan. Here’s what to expect:
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All co-owners submit applications – Every tenant in common needs to complete a full loan application, even if their income isn’t being used to qualify.
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Standard property appraisal – The lender will order a standard appraisal based on 100% ownership interest, not the individual shares.
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Shared liability for payments – Loan documents state that each borrower is jointly liable for the full monthly payments and loan balance.
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Ownership affidavit – An affidavit may be required confirming that all applicants are tenants in common with designated percentages. This gets recorded with deed.
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Title insurance reflects ownership – The title policy needs to indicate the co-owners and their percentages under tenancy in common.
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Designate one point of contact – Appoint one co-owner as the primary contact person for organizing documents and communicating with lender.
Pros and Cons of Joint Mortgages as Tenants in Common
Let’s recap some of the key advantages and disadvantages of getting a mortgage together as TIC:
Pros
- Share purchase costs with others
- Qualify for larger loan amount
- Lower down payment if co-owners contribute
- Build home equity and share later sales proceeds
- Flexibility to sell individual interests later
Cons
- All owners must qualify and be on mortgage
- Entire property secures the debt
- Shared ongoing liability for payments
- Refinancing requires participation from all
- Transferring interests requires lender approval
As with any shared ownership, open communication is key between co-owners when taking out mortgage loans as TIC. Consulting professionals like real estate attorneys can also help structure a practical legal agreement.
Alternatives to Consider
Besides tenants in common, there are a couple other options to think about for shared homeownership:
Joint tenancy – Co-owners have equal divided interests that pass to survivors upon death. Requires owner approval to sell or transfer interests.
Tenancy by the entirety – Ownership form reserved only for married couples. Requires spousal consent to sell or transfer interests. Survivor gets full ownership.
These options have more restrictions but include rights of survivorship. An attorney can advise which works best for your situation. Tenancy in common offers more flexibility for co-borrowers.
Key Takeaways
When considering a mortgage with other co-owners as TIC, keep these key points in mind:
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All owners must jointly qualify and be obligated on the loan.
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Work with an experienced lender who is familiar with tenancy in common.
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Get professional legal advice to properly structure shared ownership.
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Understand that all owners share ongoing liability even if interests change.
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Look for lenders willing to accommodate unique TIC requirements.
With proper planning and advice, getting a tenancy in common mortgage can be a great path to shared homeownership. Just make sure all owners are fully committed and work with professionals to protect everyone’s interests.
When does a tenants-in-common mortgage make sense?
A tenants-in-common mortgage might make sense if two or more friends decide that they want to buy a home together because they can’t afford one on their own. Ownership shares in the home could be dependent on what each person is able to pay towards a down payment and the monthly mortgage.
A tenants-in-common mortgage arrangement is also a good option for non-family members or those not romantically linked who want to share the cost of buying a house. This is true because there is no right of survivorship, meaning that if one of the co-owners dies, his or her share of the property goes to their estate (and thus their heirs) rather than to the other owners. Separate agreements could be made to cover things like housing costs and what happens in the event one co-owner passes away.
Pros and cons of a tenants-in-common mortgage
- Sharing the responsibilities and cost of a property among many owners can make home ownership more attainable.
- Each owner can leave their share of the property in their will to whomever they want.
- If relationships devolve or a co-owner is irresponsible with their mortgage payments, it could place a significant financial burden on the others.
- Individual owners have no control over what the other owners do with their share of the property.
Tenants In Common | How Does It Work & When Should You Use It?
FAQ
What is the downside of tenants in common?
Can tenants in common borrow against property?
What does a tenancy in common allow for?
What is a tenancy in common in New Jersey?
What is tenancy in common?
Tenancy in common is a form of equal or unequal undivided ownership between two or more people known as Tenancy in Common. This is one of the most common types of property ownership, with the others being tenancy in severalty, joint tenancy, and tenancy by entirety.
How do I finance a tenancy in common arrangement?
Additional tenants can also be added at any time. There are two options when it comes to financing a tenancy in common arrangement: group loans or fractional loans. In a group loan structure, each member of the group agrees to pay their share of the mortgage loan.
What is tenancy in common (TIC)?
Tenancy in common (TIC) is an arrangement in which two or more people share ownership rights of a property. According to this passage, when one of them dies, the property passes to that tenant’s beneficiaries or heirs.
Can tenancy in common help you buy a property?
Most of the time, private property purchases are pretty straightforward: An individual or family finds a property they’re interested in, they go through the sales process and purchase it, and it’s all good. But there are instances where it’s a little more complicated, and tenancy in common (TIC) can be a good solution.