How Does a Co-Ownership Mortgage Work?

How Does a Co-Ownership Mortgage Work

Owning a home does not have to be a solitary venture. It is possible to co-own a home with family members or friends in order to share the burdens of homeownership, both financial and otherwise. 

In addition, co-owning a home with a business—a home financier—can provide an alternative to a traditional mortgage loan. This type of co-ownership model of home financing avoids the use of interest and provides a more equitable approach than a lender-borrower relationship, with unique protections for the home buyer.   

Either or both types of co-ownership can offer benefits to a prospective homeowner. 

What Is Co-Ownership of Property? 

Co-ownership is a legal way for two or more parties to own a property together. It is common for married couples to own their home together with both of their names registered on the deed, but there are other forms co-ownership can take. Friends or other family members also can buy a home together, and homebuyers also can purchase a home together with a business in an alternative to a traditional mortgage.  

How Co-Ownership Works 

Co-ownership can take a variety of forms, and the rights and responsibilities may vary depending on the ownership structure. When all of the owners are individuals (not businesses or trusts), they may need to make some decisions about the type of contract they wish to enter. Two of the most common types of joint ownership are known as tenants in common or joint tenants with right of survivorship. 

Joint Tenancy 

When the co-owners enter their contract as joint tenants with a friend or family member, they all hold equal ownership rights in the joint-owned property, and they usually all share the same financing. All of them must enter the arrangement through the same deed at the same time; if another co-owner were to be added, the agreement would be nullified. In order to sell the property, all co-owners must agree. If one co-owner dies, their share automatically goes to the surviving co-owners; it cannot be inherited by a different heir.

This joint tenancy arrangement is most commonly used by couples and families. 

Tenancy in Common (TIC) 

Tenancy in common is often used by people who are not related and for multi-unit homes such as duplexes.

In this type of co-ownership arrangement, each co-owner owns a share of the property, though not a specific physical portion of the property. Shares do not have to be equal; for example, one owner may own an 80 percent share in the property while another owns 20 percent, corresponding with their investment at the time of purchase.  

Additional co-owners may be added at any time. Tenants in common may each have their own separate financing for their stake in the property, and each co-owner can sell his or her share of the property.

Unlike with joint tenancy, in this arrangement, co-owners do not inherit each other’s stakes in the property. Instead, each stake in the property goes to his or her heirs.

In most states, tenancy in common is the default arrangement for individuals to co-own a property.  

Co-Ownership in a Conventional Mortgage 

No matter which arrangement the co-owners choose, if individuals are purchasing the home together through a conventional mortgage, they maintain a lender-borrower relationship with their mortgage lender. This applies whether they have each secured separate financing or they are all on the same mortgage. 

Co-Ownership with Guidance Residential 

There is another scenario that is quite different from the options above. Rather than individuals buying a home together as co-owners, homebuyers can also buy a home together with a business in a co-ownership approach to home financing. This is a little-known but fast-growing alternative to a traditional mortgage.  

In this case, the financier, such as Guidance Residential, will be a co-owner with the home buyer. Initially, each party owns a portion of the home that corresponds with the portion of the price they paid. Gradually, through monthly payments, the customer’s share increases while the company’s decreases until the customer owns the entire property.

This arrangement looks different from the scenarios in which all of the co-owners are individuals. This is partly because the financier will not be occupying the home.  

Benefits of Co-Ownership Home Financing

This co-ownership approach to financing is frequently appealing to home buyers such as Muslims whose faith prohibits the use of interest-bearing loans.

In this case, the financing is not a loan at all, and no interest is involved. Rather than paying back a loan, the customer gradually buys out the financier’s share of the property through monthly payments that are equivalent to mortgage payments.

Although the company is a co-owner for the purpose of financing, the customer’s situation is not like a renter’s—rather, he or she maintains full control of and responsibility for the property from the beginning, like any homeowner. Each party’s rights and responsibilities are spelled out in the contract, with special protections afforded to the customer that do not exist in a traditional mortgage.  

This arrangement is sometimes called an Islamic loan, but it is actually not a loan at all. A better term is Islamic home financing. (And neither are  Islamic mortgages just for Muslims

Limited Liability Company (LLC) Joint Ownership 

In Guidance Residential’s co-ownership model of Islamic home financing, the customer finds the home they wish to buy and they bring in Guidance Residential as a co-owner to help finance the home. At this time, a Limited Liability Company (LLC) is formed.

In a written agreement, the two parties agree on what percent the customer will pay and what percent Guidance will pay. After the contract goes into effect, they will then own corresponding stakes in the home. 

This form of financing as available for home buyers to use to buy a house either as a primary residence or an investment property.

Increasing Ownership Share 

Over time, through monthly payments, the customer then gradually buys Guidance’s share of the home. These payments appear similar to a monthly mortgage payment for the sake of simplicity both for the homeowner and for regulators, although they are based on a different foundation from a conventional mortgage.

The monthly payment consists of two elements—a profit payment, which the customer pays the financier in return for using their portion of the property, and an acquisition payment, which allows the customer to acquire an increasing share of the home.

As the customer’s ownership interest of the home increases, Guidance’s ownership share decreases. 

Protections for the Customer 

While Guidance Residential began using LLCs in order to prevent the homeowner from having to deal with interest, this arrangement offers additional protections for the homeowner.

First, it acts separately from any other assets that they may own, such as a 401k account or a savings account. In the case of default and foreclosure, only the home can be sold to recoup losses — not any of the homeowner’s other assets, unlike with a traditional mortgage.

The LLC structure also enables Guidance to share certain risks that normally fall entirely upon homeowners who have chosen a mortgage loan. For example, Guidance assumes a portion of the risk in the case of some natural disasters.

Combining Forms of Co-Ownership 

It is important to note it’s possible to combine the forms of co-ownership described above. Multiple owners may join together to co-own a home while also benefiting from co-ownership with a financier such as Guidance Residential. Each of the co-buyers’ rights and responsibilities will be spelled out in the co-ownership agreement.  

Is Co-Ownership a Good Idea? 

When deciding whether to enter a co-ownership agreement, a home buyer may want to consider the pros and cons of partnering with someone else in owning and managing a property. 

Pros of Co-Owning a Home 

Co-owning a home with other individuals can ease the burden of homeownership in many ways, by sharing the financial responsibility and risks between multiple owners, whether they are friends or family members. This may allow homebuyers to buy a home earlier than they could do alone. 

Co-ownership with a financing company can offer additional risk protection as well as prevent the home buyer from having to deal with an interest-bearing loan or an inequitable lender-borrower relationship. 

Cons of Co-Owning a Home 

Most of the cons of co-buying a home with a family member or friend fall in the realm of forming a major partnership with other individuals. Opportunities for conflict abound in joint ownership with other individuals.

If one co-buyer falls short of their responsibilities with regard to payments or maintenance of the co-owned property, the burden will fall on the other co-owners. To reduce the risk of conflict, outline expectations in advance. Create a partnership agreement in writing, outlining each co-owner’s responsibilities as well as consequences if they fail to meet them. It’s also worth noting that the buyer with the lowest credit score determines the rate they will pay if they are financing the property together. 

To prevent these types of conflicts, it may be worth meeting with a real estate attorney to ensure that expectations are clear in all cases, even those no one likes to think about, such as if a co-owner defaults. How will ongoing financial responsibilities be divided between the other owners? What will happen to the co-owned home in the case that a co-owner passes? Will it go to the heirs of the surviving owner?

Fortunately, there are few, if any, downsides to co-owning a home with a financier as an alternative to a mortgage loan. The home buyer simply receives all of the benefits and even more protections than with a traditional mortgage.

How Does It Work?

Buying a home using Islamic financing through Guidance Residential looks similar to using a conventional mortgage from the home buyer’s perspective although the structure underneath is completely different. This makes it easy for them to compare options, and it makes it easy for regulators as well.

First, you will complete a mortgage application and submit documentation regarding your income and other financial obligations. Then you will receive a letter stating the financing you qualify for. As with any other financier, your credit scores are important.

After you find your home and your offer is accepted, you’ll add the details on that home, get inspections done, and proceed toward closing.

Costs to be aware of include a down payment, closing costs, property taxes, and private mortgage insurance if your down payment is less than 20%. You will then make monthly mortgage payments

The Bottom Line: When Co-Owning a Home, What Are My Rights? 

A co-owner’s rights will depend on the type of ownership arrangement they choose. In the case of individuals, this typically means joint tenancy vs. tenancy in common.

Joint tenants are more restricted than tenants in common. Joint tenants may only own equal shares. They cannot add additional co-owners. They cannot pass their share to heirs other than their co-owner(s) and must agree together if they want to sell the property. Tenants in common have more flexibility. They may own unequal shares and dispose of their own share as they like (sell it or pass it to heirs). Although they each own only a share of the home, they all have the right to use the entire property. 

In a co-ownership model to home financing with Guidance Residential, the co-owning individual maintains all of the typical rights of a homeowner, such as full control of the entire property to use as they wish. If they sell the home, they will receive all of the profit. The company’s rights are limited as the purpose of the partnership is solely to finance the home in a halal manner and to generate a limited profit in order to be able to finance additional homes. Learn more about our program. 

Get Pre-Qualified for a Co-Ownership Mortgage Alternative Today 

A co-ownership mortgage opens up new opportunities in homeownership. For home buyers who prefer to avoid a traditional mortgage, a co-ownership model of home financing offers an appealing alternative. Guidance Residential is the leading provider of Islamic home financing, using a proven co-ownership model.  

Begin today: pre-qualify online in fewer than 10 minutes

Originally published in December 2021, updated February 2024.