Can a Tenant In Common Mortgage Property?

Gathering three or more people into a tenancy in common (TIC) arrangement can be one way to buy and hold real estate. This type of set-up can help investors secure better-quality real estate, with a potentially higher targeted cash flow.

But the issue can be confused by how such acquisitions are financed. Can a tenant in common mortgage property? More specifically, can TIC members obtain appropriate financing, or even refinance, properties they own?

The answer is, yes. In fact, there are two ways in which TIC members can finance their holdings: Group loans and fractional loans.

The Review: What is a TIC?

Also known as tenant-in-common, or tenants-in-common, the TIC represents a legal ownership structure in which two or more investors co-own individual, undivided interests in property. 

As such, TIC members are fractional owners. In other words, such an arrangement allows for the pooling of capital, with costs and profits split between the owners. The ownership percentage is usually determined by the amount each TIC member contributes to ownership and capitalization; many times, the contribution isn’t necessarily an equal split. And, TIC members can determine who receive their shares upon their death.

There are specific requirements pertaining to TICs, such as the following.

• Co-owners are required to share costs, based on the percentage they own.
• TICs can only have 35 members.
• All decisions regarding acquisition, disposition, and management must be approved by all co-owners.

When it comes to financing decisions, however, a great deal depends on the mortgage structure.

Group Loans: All in Together

Tenant-in-common members are legal co-owners of a specific real estate property. And, a group loan means that those co-owners all apply for a single mortgage. Under a group loan arrangement, the lender

• Examines and assesses the credit of each TIC member
• Pulls together the group’s total assets and income to determine their ability to pay off the loan
• Sets up the financing, with all TIC members as signatories

The main disadvantage of a group loan is that all members are responsible for its payment. This is the case, even if one of the TIC members can’t pay his or her share of the mortgage. In this case, that payment becomes the responsibility of the other members. 

Because of this, group loans could appear to be more advantageous to the lender. In the event of a default, the bank or financial institution can take possession of an entire property, versus an ownership slice. But a deeper dive shows that a group loan can be helpful to TIC members.

For instance, a co-owner who might not have much in savings might find it advantageous to pool resources with others. Furthermore, a TIC member with potentially poor credit might benefit from TIC participation; as the loan is paid off, it could be beneficial to his/her credit score. 

Fractional Loans: Only When Separation Will Do

Recognizing some of the downfalls of a group loan, lenders began offering fractional loans in the early 2000s. As can be surmised, fractional loans involve preparation and underwriting of different mortgages for each fractional owner of a TIC. Each note is signed only by that TIC owner, and is secured by that owner’s particular deed, or common share. If that owner defaults on the loan, the lender forecloses only on that owner’s share, and may sell it. 

The main benefit of a fractional loan for a TIC is that one member’s default doesn’t impact the entire arrangement. Only one share is foreclosed on. But lenders might not be as willing to offer fractional loans as a product – the lack of a secondary market for fractional shares can be a detriment. 

Furthermore, fractional loans tend to be shorter and carry higher interest rates. Additionally, in the event of a foreclosure, the lender sells a fractional share to another investor, who could end up being an undesirable partner to other TIC members.

Financing Considerations

The answer to the question as to whether a tenant in common can mortgage property is yes. In fact, TIC members have two choices when it comes to financing and/or refinancing. Each of these methods has their advantages and disadvantages. As such, it’s a good idea to conduct careful research to determine the best mortgage path.