Can One Person Take Out a Loan on a Jointly-Owned Property?

Jointly-owned property raises questions when one owner seeks to use it as collateral for a loan. A common inquiry is whether a single individual can secure financing against a jointly-held asset without the involvement of all co-owners. This article explores the conditions under which one owner might act alone and when universal consent is required.

When One Owner Can Act Alone

Under “Tenancy in Common” (TIC), one owner may legally encumber their individual interest in a jointly-owned property. Each co-owner holds a distinct, undivided fractional share. While they share possession of the entire property, their ownership interest is separate and can be transferred, sold, or mortgaged independently.

If a tenant in common seeks a loan, they could offer their percentage share as collateral, with the lien applying only to their interest. However, lenders are reluctant to provide loans secured solely by a fractional interest. Foreclosing on such an interest makes the lender a co-owner, presenting practical and legal complexities.

A lender would become a co-owner, inheriting shared property management challenges and potential disputes. Selling a fractional interest is also more difficult than selling an entire property, reducing collateral liquidity. Thus, finding a lender for a loan secured only by a partial TIC interest is uncommon due to increased risk and diminished value.

Property-backed loans differ from personal loans. A personal loan relies solely on an individual’s creditworthiness and does not use real estate as collateral. For personal loans, co-owner consent is not required, as the property is not pledged. However, these are not “loans on jointly-owned property” in the sense of using the real estate as direct security.

When All Owners Must Consent

For most loans collateralized by jointly-owned property, all legal owners’ consent and signatures are required. This stems from ownership structures designed to ensure collective control. In “Joint Tenancy with Right of Survivorship” (JTWROS), co-owners hold an undivided interest, and a deceased joint tenant’s interest automatically passes to survivors, bypassing probate.

The “unity of interest” in JTWROS means no single joint tenant can encumber the property without all others’ agreement. Attempting to do so can sever the joint tenancy. To secure a loan against the entire property, lenders require all joint tenants to sign, ensuring a valid and enforceable lien and a clear recovery path upon default.

“Tenancy by the Entirety” (TBE), available to married couples in many states, treats the couple as a single legal entity. Neither spouse can unilaterally sell, transfer, or encumber the property without the other’s consent. TBE protects against individual creditors of one spouse. For any property-backed loan, both spouses must sign, acknowledging the lien on the entire property.

In “Community Property” states, assets acquired during marriage are generally equally owned by both spouses. Both spouses typically must consent to and sign any agreements that encumber community real property. Even if only one spouse is on the deed, both signatures are often required for a valid mortgage, securing the lender’s claim against the property’s full legal ownership.

Lender Considerations and Due Diligence

Lenders prioritize securing a clear and enforceable lien on the entire collateral property, driven by risk mitigation and investment protection. Since the property is the primary recourse upon default, lenders conduct extensive due diligence to ensure their lien’s validity and enforceability.

A thorough title search identifies all legal owners and existing encumbrances, confirming who holds title and whose signatures are necessary for a valid mortgage. Lenders aim for a first-position lien, meaning their claim is satisfied before other debts in foreclosure. Without all legal owners’ consent, obtaining a clear lien on the entire property is impossible, making the loan significantly riskier.

Standard loan applications for property-backed financing include all legal owners as signatories. They may sign as borrowers, directly liable for the debt, or as parties consenting to the lien, acknowledging the property is pledged. This ensures all parties with an ownership interest agree to the encumbrance, preventing future legal challenges to the lender’s claim.

Lenders’ primary concern is ensuring collateral can be fully claimed and liquidated upon default. If only one co-owner signs, the lender’s ability to foreclose on the entire property could be hampered or invalidated by non-consenting co-owners. This potential for dispute and foreclosure complexity makes such arrangements undesirable. Lenders consistently require all owners’ consent to safeguard their investment and simplify the recovery process, often requiring title insurance.