Have you ever thought of buying a vacation home or investment property with a partner, spouse, friend or relative? You might be more interested in looking at listings for mountain getaways than learning about the ways that the law recognizes forms of co-ownership, but if you want to protect your relationship with your co-owners while also protecting your rights, you’ll want to know how joint tenancy works.
Read on to learn about a joint tenancy and what it entails.
Joint tenancy is a legal term for an arrangement that defines the ownership interests and rights among two or more co-owners of real property. In a joint tenancy, two or more people own property together, each with equal rights and responsibilities.
While joint tenancy can apply to personal property, business ownership, bank and brokerage accounts, it’s most used for real estate investments. When purchasing property, joint tenancy provides all parties with equal rights to and responsibilities for the real estate purchased.
Although joint tenants receive the same amount of interest in the property, there are limitations to using their shares. The most critical condition of this type of joint ownership is that it includes the right of survivorship, which prevents co-tenants’ heirs from inheriting their shares of the property.
We tend to think of property ownership in binary terms: You either own it or don’t. But in reality, property ownership rights can take many forms, depending on what rights a person owns.
There are a variety of legally recognized co-ownership arrangements, like tenancy by entirety and tenancy in common. Joint tenancy is by far the most common, because most people who purchase homes together are married, have a partnership or are related and wish to pass their property to their joint tenant.
Joint tenants share an equal interest in the ownership of an entire property. Any tenant can access all parts of the property without limitation or restriction. Joint tenants can be at the property at any time, either together or separately.
The key feature that distinguishes joint tenancy from other types of ownership rights is that the surviving joint tenant(s) acquires the shares held by another tenant upon their death.
Sometimes referred to by its full name (joint tenants with right of survivorship) or the acronym “JTWROS," a joint tenancy creates rights of survivorship upon a tenant’s death. This means that when a joint tenant dies, their shares automatically transfer to the surviving co-tenant(s). In fact, from the moment of the owner’s death, rights of survivorship and responsibility for the mortgage vest in the surviving tenant(s).
In the case of a conflict between joint tenancy rights and the deceased’s will, the rights of survivorship win. The property does not go through probate, and the surviving co-tenant(s) immediately gains the decedent's property interest, as well as all mortgage responsibility.
It’s worth noting that if you’re not on the mortgage and the responsibility becomes yours for the payments, you should make them because that will allow you to stay in your home. However, if the home does end up in foreclosure, it won’t reflect negatively on your credit score because your mortgage company doesn’t report credit to anyone who isn’t listed on the note.
The last living co-tenant becomes the sole owner of the property and may include the property in their will and bequeath ownership to their heirs.
Nearly anyone can enter joint tenancy agreements: married or unmarried couples, family members, investment partners or friends. Your real estate attorney can craft a co-ownership agreement that meets the legal requirements in your state or jurisdiction, and is in the best position to make sure that you’re buying exactly what you think you’re buying.
However, certain conditions must be met for a joint tenancy agreement to be made. All co-tenants must acquire equal shares of the property through the same deed at the same time. With their equal interest, joint tenants also share equal financial responsibilities for the property, meaning all co-tenants are liable for any loans taken out against the property.
A co-tenant may not sell their shares of the property without the consent of all other tenants. Instead of selling, a joint tenant can transfer their shares to another person.
However, transferring shares terminates the joint tenancy agreement, forcing the new co-owner to enter a new ownership arrangement with the remaining co-tenant(s). The new arrangement, known as a tenancy in common, will be discussed in more detail in the next section of this article.
Joint tenancy is similar to another common co-ownership arrangement called tenancy in common. These two homeownership arrangements may sound nearly identical, but there are several key differences between them. Understanding how joint tenancy differs from tenancy in common can help you decide which arrangement is right for your situation.
While joint tenants must obtain equal shares of the property through the same house title at the same time, tenants in common can split their interests however they like and enter into the agreement at any time.
You can think about this as the co-owners dividing their interest into percentages. In a joint tenancy agreement, two co-owners would each have a 50% interest in the property. With a tenancy in common with two co-owners, one tenant could hold 70% ownership while the other could hold 30%.
With a tenancy in common, financial responsibility can also be assumed proportionately. Although joint tenants are equally liable for all debts against the property, tenants in common can use their own shares as collateral and take on sole financial responsibility for loans.
Another important difference between the two forms of ownership is that, if you enter a tenancy in common, you are not automatically creating rights of survivorship. So, co-tenants can pass the property down to their heirs as an inheritance.
There is also more flexibility when it comes to disposing of the property, either through a sale, gift or inheritance. Unlike joint tenancy, tenancy in common enables co-tenants to sell their interest in the property without the consent of their co-owner(s).
Typically, borrowers must have a credit score of at least 620 and a debt-to-income ratio (DTI) below 50% to qualify for a conventional mortgage loan. But when applying for a mortgage as a joint tenant, co-tenants can combine their income and debts to increase their chances of qualifying for a mortgage.
So, as long as each co-tenant has a strong credit score, they generally have an easier time meeting the DTI requirements and can even be approved for a lower interest rate.
Joint tenancy can provide a more accessible entry into homeownership for first-time home buyers and those interested in real estate investing. Let’s go over some of the advantages of entering a joint tenancy ownership arrangement.
The most significant benefit of joint tenancy is that it makes homeownership more affordable. Joint tenancy enables co-tenants to split the down payment and provides them with an advantage when it comes to qualifying for a mortgage.
Joint tenancy also ensures that co-owners can share all responsibilities for paying off debts, maintaining and improving the property and renting it out (if the property is used to generate rental income). The fact that co-tenants possess equal shares of the property gives every party incentive to do their part to protect their investment.
Since joint tenancy includes the rights of survivorship, co-tenants also benefit from the ability to avoid probate, the lengthy legal process that the court system uses to validate wills. Instead of going through the probate process, the surviving co-tenant(s) have immediate access to their shares of the property regardless of whether the deceased owner had written out a will.
The rigid conditions of joint tenancy may protect you if your co-tenant(s) attempts to take advantage of your investment. Still, those same conditions can make it challenging for you as well. Here are some potential disadvantages of co-owning a property through a joint tenancy agreement.
If a co-owner loses their job or runs into financial difficulties, the other parties involved in the agreement are responsible for continuing to make all mortgage payments and preventing the property from going into default.
If a change occurs in the relationship between joint tenants, difficulties can also arise. Since all decisions regarding the property must be made jointly, it can be challenging to navigate disagreements. No one can sell the property or their shares of the property without the express permission of all other co-tenants.
And, with the rights of survivorship, only the last living co-tenant can pass the asset onto their heirs.