The trend of buying a house with friends or a live-in partner has become increasingly popular. Family members (and even neighbors) often join together to purchase residential or vacation properties for their shared use.
The idea makes economic sense for the buyers who can often afford a more expensive property than if they were purchasing on their own. Plus, they have the advantage of sharing property taxes, upkeep and mortgage payment costs among the other owners.
But there are several issues you should consider if you’re thinking about this arrangement: How will you pay for the property — all cash or with a mortgage? How will the expenses and upkeep be shared? How will you hold title — together in a partnership or individually? And what will happen if you or one of the other owners dies or decides to sell their share?
Of course, married couples face these same issues — as well as divorce — when they buy property together.
Co-owners often ask if it is possible to buy property together when only one potential owner qualifies for the mortgage. The answer is yes, oftentimes they can.
Many lenders allow one borrower to apply for a mortgage in which several owners hold title to the property. Married couples also can choose to have only one spouse apply for the loan, but both can take title to the house.
Remember there are two main parts to every mortgage: the promissory note – the promise to repay the debt — and the mortgage document (or Deed of Trust). Together, they pledge the property as collateral in the event the note is not paid as required. All “co-owners in title” will be asked to sign the mortgage instrument, but only the “qualifying co-owner/borrower” will be asked to sign both the mortgage and the note.
Since (presumably) all the owners will share in some manner of proportional payment for the mortgage, it is important that each owner understand the terms of the note and the provisions contained in the mortgage. Most mortgages contain a clause — called a “due-on-sale” or acceleration clause — that could have significant consequences if something were to happen to the borrower (for example, a divorce or death). The due-on-sale clause is intended to prevent an owner from transferring the property that secures the mortgage to a new owner without the lender’s approval.
Prior to 1982, regulation of the due-on-sale provision was left up to the individual states. But 33 years ago, the federal government stepped in and took control when it passed the Garn-St. Germain Depository Institutions Act. It became a federal law to restrict borrowers from selling the mortgaged property to another owner without paying off the loan in full.
The act, however, to the advantage of some owners, also listed certain circumstances that are exempt from the ruling and would prevent a lender from enforcing the due-on-sale clause. Those exclusions include the following situations:
When borrowers place the property in their own inter vivos (living) trust.
When a transfer is made to a spouse as part of a divorce or dissolution of marriage.
When title is transferred by inheritance to a related owner-occupant
When a surviving joint tenant takes title.
When a surviving joint tenant takes title – after another joint tenant dies.
Over the years, an owner’s right to take over or assume an existing mortgage from another owner, even when the exceptions apply, has been questioned and debated. In 2014, the Consumer Financial Protection Bureau (CFPB) issued an interpretive rule to help clarify situations that involve surviving family members or “successors-in-interest” (i.e., “a person who receives legal interest in a property, typically from a family member, by operation upon another’s death, or under a divorce decree or separation agreement”).
Samuel Gilford, a spokesman at the CFPB, suggested this link to an explanation of the bureau’s efforts to protect the interests of surviving family members.
Since due-on-sale matters may be changed at any time by further rulings and legislation, be sure to verify the current practice of your lender regarding assumptions (taking over an existing loan) when there is a divorce or death of one property owner.
Mike Malloy, vice president of servicing at Quicken Loans, recommended that either the divorced spouse or in the case of a death, the heirs and the executor of the estate, contact the loan servicer as soon as possible to learn about the mortgage options available to them.
Federal Housing Administration (FHA) loans are the exception to the previous restrictions, and allow an existing mortgage to be assumed by a new owner, subject to certain qualifying criteria. FHA mortgages originated after Dec. 1, 1986, require a borrower who will assume an existing mortgage to go through the “Creditworthiness Assumption” process. Refer to the Assumption Chart on the HUD Web site to begin the process.
You can also contact a HUD representative for further information at 1-800-569-4287.
The best possible protection for co-owners – whether in a marriage, a partnership, or as individuals in a relationship – is to work with a real estate attorney to draw up a co-habitation and property agreement document that provides for every eventuality. The agreement should take into consideration how the ownership will be divided — for example, in either equal equity shares or to be determined by the amount of time each owner will use the property.
How the expenses will be paid (and shared), what will happen if the owner on the mortgage defaults, or if one of the owners dies or becomes divorced should also be included.
The manner in which the co-owners take title is an important decision that can affect each owner’s rights to ownership, and it should be carefully discussed with your attorney or tax adviser. Keep in mind that the state where you reside will determine your available title choices.