Tenancy In Common: What Is It And When It Matters

When people envision buying a home, they typically imagine living there by themselves or with their family. But for various reasons — often largely economic, but not entirely — some people choose to engage in “tenancy in common.” In this arrangement, a buyer brings in other people who buy a percentage of the property and serve as joint tenants.

Unorthodox? Maybe. But this arrangement might work for you — read on to find out the details and the pros and cons.

Tenancy in Common Definition

Tenancy in common refers to a housing situation in which two or more individuals possess legal title or ownership rights over the same property. In this arrangement, co-owners share the property’s ownership and the associated expenses — although not necessarily equally. One owner, for instance, might assume 50% of ownership, while the other two owners may take up 25% each.  

This arrangement can be economically beneficial for all owners, who get the benefits of homeownership without having to pay the full amount of the mortgage.

Methods of Joint Ownership

There are three ways of creating legal arrangements for multiple people to own one property, including:

• Tenancy in common: In this arrangement, two or more tenants of a property own part of the home. Each tenant in common has a separate interest in the property, and their ownership shares can be equal — but they don’t have to be. This differs from joint tenancy because there is no right of survivorship, so if one tenant dies in a tenancy in common, their share passes to their heirs rather than automatically transferring to the remaining tenants.
• Joint tenancy: As noted, joint tenancy comes with right of survivorship, which means a tenant’s portion of a property goes to the other owners if that tenant dies. Also, joint tenancy requires all owners to get their ownership interest at the same time and in the same way, while tenancy in common and tenancy by entirety allow people to acquire their interests separately. Also, joint tenancy requires each owner to possess an equal share.
• Tenancy in the entirety: Tenancy in the entirety is to a form of shared property ownership that is reserved for married couples, as it permits spouses to jointly own property as a single legal entity.

Given the myriad options available for joint ownership of property, it stands to reason that hiring a real estate attorney is a logical choice when pursuing this option. 

How Tenancy in Common Works

Clearly a tenancy in common arrangement can be beneficial to those involved, but it can also be complicated. Here is some insight into how this works when you are purchasing a home.

How a Tenancy in Common Is Formed

If you are interested in creating a tenancy in common, here are the steps you’ll need to follow:

1. Get preapproved for a mortgage: Given that each tenant in common owns part of the property, each should obtain preapproval from a lender to ensure they have access to the necessary funds.
2. Hire a real estate attorney: Buying any property is complicated, but tenancy in common can be an especially complex process. That’s why we recommend hiring a real estate attorney, who can draft the requisite legal documents and advise you on the specific rights and responsibilities of a tenancy in common arrangement.
3. Decide on the percentage of ownership: Before finalizing their deal, tenants in common must determine the percentage of ownership each party will hold in the property. This is typically based on each tenant’s respective financial contributions.
4. Work with a real estate agent: Navigating the complex world of property ownership can be easier if you have a knowledgeable real estate agent to guide you. A good agent can help you find suitable properties, submit offers and negotiate the final purchase.
5. Submit an offer on the property: Once you find the right property, you can work with your real estate agent to submit an offer that outlines the proposed purchase price, contingencies and any other relevant purchasing terms.

A Real-Life Example

Let’s say Claudia wants to buy a house but doesn’t have enough for the down payment, mortgage and all the other costs that come with purchasing a property. So, she talks to her friends Roberto and Angela, and they decide to purchase a house together through tenancy in common. Claudia had the idea and she has the most money, so let’s say she put in 40% for the property, while Roberto and Angela both contributed 30%.

Their ownership shares in the property reflect their contributions, which means Claudia owns a 40% stake in the house, while Roberto and Angela each have a 30% interest. To put together this complex arrangement, they hired a real estate attorney to draft the necessary legal documents that outlined their respective rights and responsibilities. With the help of a real estate agent, they successfully submitted an offer on a three-bedroom house.

Interested in another very interesting real-life story that features unlikely people who bought a tenancy in common home? Check out the Home. Made. Podcast episode “Chosen Family.”

Advantages And Disadvantages of Tenancy in Common

Living with a tenancy in common arrangement can have advantages and disadvantages. They include:

Pros

A tenancy in common may be a good option for some homebuyers — but not all. Here are some of the benefits of this arrangement:

• Affordability: One of the main benefits of a tenancy in common arrangement is that it can make homeownership more affordable for all tenants. By pooling resources with other buyers, you can split the costs of the down payment, mortgage fees and other expenses that come with buying and maintaining a property. This can enable you to afford a larger home than you might otherwise be able to purchase.
• Maintenance: Owning a home can be very complicated — keeping a property in good shape can include tasks such as maintaining landscaping, making repairs, paying utilities and much more. In a tenancy in common, the responsibilities and costs of sustaining the property are shared among the co-owners. By dividing these responsibilities, the burden on each individual is reduced, making the entire effort more manageable.
• Mortgage approval: Lenders tend to view tenancy in common arrangements favorably because the combined income and assets of the co-owners can improve the chances of qualifying for a mortgage. This can be an especially positive element if you don’t meet the income or credit requirements on your own.
• Flexible options: With a tenancy in common, the co-owners don't have to split the property equally. This flexibility allows for customized arrangements that suit the specific needs and circumstances of everyone involved.

Cons

Tenancy in common isn’t ideal for everyone. Here are some of the potential disadvantages of a tenancy in common:

• Property doesn’t automatically transfer upon death: If a tenant dies in a tenancy in common, their ownership transfers to their heirs. That can create a challenging situation for the other tenants.
• Potential for default: Also, if one of the owners defaults on their financial obligations, it can create serious problems for the others. If one of the owners stops making their mortgage payments, for instance, the lender could initiate foreclosure proceedings against the entire property, putting the other tenants' shares at risk.
• Impact on credit history: When you enter into a tenancy in common, you are jointly responsible for paying the mortgage and other expenses related to the property. If one of the owners fails to make their share of the payments, it can negatively affect the credit scores of all the owners listed on the mortgage.
• Complicated process to dissolve tenancy in common: Establishing a tenancy in common is complicated — as is dissolving it. Given the already-complicated process of owning a house, the difficult process this presents might simply make it not worth the trouble for some.

Tenancy in Common FAQs

Given the different factors at play in tenancy in common, it only stands to reason that questions would arise. Here are some of the more frequent questions we see:

What’s the difference between tenancy in common and joint tenancy?

In a tenancy in common, each owner has a separate share of the property that they can sell or leave to someone in their will. But with joint tenancy, if one owner dies, their share automatically goes to the other owners. Tenancy in common also allows the owners to have different percentages of ownership — see the previous example with three ownerships of 40%-30%-30% — whereas joint tenancy requires equal ownership shares.

Lastly, tenants in common can obtain their shares separately and at different times in a tenancy in common, but all the owners have to acquire their ownership interest at the same time in a joint tenancy.

What is the downside of tenancy in common?

If a tenant dies in a tenancy in common arrangement, their ownership transfers to their heirs, which can make an already taxing situation even more difficult. Also, this situation requires all the owners to be financially responsible — if just one of the owners doesn’t make their payments, it can lead to foreclosure proceedings that could have devastating impacts on the other tenants.

When a tenant in common dies, what happens to the tenant’s interest in the estate?

If an owner dies in a tenancy in common, their shares go to whoever they designate in their will. This can lead to an onerous situation for the other owners, who may now be forced to share a house with a stranger.

Does tenancy in common impact my mortgage?

Yes, if you have a tenancy in common, your mortgage will likely be lower than if you owned the property yourself. That’s because your mortgage will be split among other tenants, as opposed to being solely your own responsibility.

Do deeds show all of the tenants in common?

Yes, deeds typically show all of the tenants in common. Ensuring everyone's names and shares are documented on the deed codifies the tenancy in common arrangement.

The Bottom Line

Tenancy in common is a somewhat unorthodox method of property ownership, and it can be risky — if one person in the arrangement fails to uphold their end of the bargain, the results can be catastrophic for everyone. Your credit rating can be greatly damaged, for instance, if your co-tenant doesn’t pay their share of the mortgage.

That said, tenancy in common comes with several benefits, too — including, perhaps most notably, a lower and affordable mortgage payment. But to create this arrangement requires an organized economic life, so download the Rocket Money^SM app to get a good view of your entire financial health, including a free credit score!