Mortgage Loans and Ownership of Real Property

When a potential home owner obtains a new mortgage loan, how the ownership of the home will be held at the time of the purchase or the time of a mortgage refinance is important for the home owner of the property as well as the mortgage lender.  Mortgage lenders have to make sure the form of ownership is an acceptable legal method to hold title and that the titled owners match the requirements of the home loan.

It is necessary for the mortgage lender to understand the different forms of ownership.  The different forms of ownership determines how a home loan borrower holds title and dramatically influences or even prohibits the property use as security for mortgage loan.

Real property can be owned by one person or by a group of two or more people.  Ownership by a single person or entity is referred to as sole ownership or ownership in severalty.  Severalty means to sever the property or to own it separately from anyone else.  Ownership by two or more people or entities is referred to as concurrent ownership.  Mortgage lenders will provide home loans in either of these cases.  Sole ownership is easier to process and leaves little room for error but may not be appropriate for all borrowers.

The major types of concurrent ownership are: tenancy in common, joint tenancy, tenancy by the entirety and community property.

Tenancy in common and joint tenancy is the two most common types of concurrent ownership.  The major difference between these two forms of ownership is the treatment of a co owner share at the time of his or her death.  In a tenancy in common, each owner’s share of the property will be distributed to his or her heirs upon their death.  In a joint tenancy, the surviving co owners have the right of survivorship.  The right of survivorship means that when the co owner dies, the surviving co owners take over his or her share and the share dos not enter the deceased owner’s estate or pass to his or her heirs.

Tenancy in common, the simplest form of concurrent ownership, exists when two or more persons each have an undivided interest in the whole property without a right of survivorship.  Each owner may hold title to equal or unequal shares, of the property while all owners share equal use and access to the entire property.  Upon the death of an owner, the deceased owner’s interest passes to his or her heirs or beneficiaries and not to the surviving owners.

Mortgage lenders prefer to have all owners agree that a property can be pledged as security.  In some instances, however, mortgage lenders may accept the pledge of an interest held in a property as a tenant in common, since the title held by each owner is independent of other owners.

Joint Tenancy

Joint tenancy differs significantly from tenancy in common.  The major difference is that each owner of the joint tenancy has the right of survivorship.  This means that the joint tenancy owner gives up the right to determine who will get the property at the time of his or her death.  Each time a joint owner dies the remaining joint owners continue own the entire property until there is only one owner left.  The last surviving owner becomes the owner in severalty.

Laws have been established in a way to protect individuals from inadvertently becoming involved in a joint ownership and unknowingly losing their right to include the property in their estate at the time of their death.  To create a joint tenancy, the law requires four unities:

Possession – Equal rights of possession for each owner.
Interest – Equal interests for each owner.
Title – Each owner must acquire his interests from the same conveying instrument.
Time – Each owner must acquire his interest at the same time.

Mortgage lenders accept the use of property held in joint tenancy as security so long as all the property owners pledge their interests; however, mortgage lenders rarely accept the pledge of a single owner’s share of a property held in joint tenancy since the ownership actually terminates upon the death of that owner.

Tenancy by the Entirety

Tenancy by entirety is a type of concurrent ownership reserved for married couples.  The husband and wife are considered to be a single legal entity that owns the entire estate.  Tenants by the entirety have the right of survivorship.  The special feature of a tenancy by the entirety is that it protects the property from foreclosure by the creditors of either spouse individually.  The property can only be encumbered by the joint action of both spouses.  In other words, no spouse may singularly acquire, dispose of, draw equity from, or transfer the property.  The agreement of both spouses is needed for any action that could, or does, affect the ownership of the property.  If a divorce were to occur, both spouses would automatically become tenants in common.

Community Property

Community property is another type of concurrent ownership that is reserved for married couples.  In fact, some states compel this form of ownership upon a husband and wife.  In states that do not compel community property laws, there are two legal classes of property for married couples: separate property and community property.

Separate property consists of all property not acquired by the efforts of either spouse, including gifts and inheritances received during the marriage and properties owned before the marriage which have been kept separate.

Community property, on the other hand, consists of all property earned through the efforts of either spouse during the marriage.  The property is considered to be owned by both of them as equal partners.  Community property is most similar to tenancy in common.  Each spouse owns his or car her half of the property and each spouse’s interest will be left to his or her heirs at the time of death.

It is always best to consult an attorney before deciding how the title to real property should be held in order to properly protect your interests as long as the form of ownerships complies with the needs of the mortgage lender in order for the mortgage lender to perfect the mortgage on the home.