Ownership interest in a property defines your rights as an owner of a property or that you have a claim to the property. Ownership is the highest form of interest and typically gives you the full rights as an owner to do what you please with the property, within the limits of the law.
You don’t have to live in a home to have an ownership interest in a property. Likewise, you can have an ownership interest if you inherit a property, split the property in a joint tenancy with your spouse, or invest a little amount in exchange for a percentage-based interest of the property.
While owning a property may seem fairly straightforward, understanding what ownership level is becomes important when applying for specific loans.
For example, HUD defines a first time homebuyer as someone who has not had an ownership interest in a home for the last three years. Even if you did not live in the home or had a 1% financial interest, you still would not qualify for an FHA loan or other first time homebuyer programs.
Now that we know what ownership interest in a property is defined as, we need to discuss what qualifies as ownership interest in a property.
Do I Have Ownership Interest in a Property?
Yes, you have ownership interest in a property if you have a legal claim to the property.
Much like you can acquire ownership interest of a company by purchasing stocks or shares, you can acquire ownership interest by investing a little or purchasing a property outright.
You can receive ownership interest in a property through the following ways:
- Investing cash directly
- Investing in a real estate investment trust (REIT)
- Sweat equity
- Tenants by entirety
- Sole ownership
- Corporate ownership
- Ownership by trust
The above examples are ways you can acquire ownership interest in a property, but they do not define what form of ownership this takes.
Depending on the nature of your investment, your form of ownership will change. For example, your ownership interest of a residential home and the liability that it carries will differ from that of a commercial real estate investor.
In general, four types of property ownership exist for residential properties:
- Sole Ownership: You have full ownership of the property.
- Joint Tenancy: You and a partner have equal ownership over a property and split all profits.
- Tenancy in Common: You and a partner negotiate a percentage-based interest of a property.
- Tenancy in Entirety: You and only a spouse enter into a joint tenancy but are taxed as a single entity.
As an investor, you can choose between three different forms of ownership:
- Sole Owner: You reserve the right to full ownership and liability of a property.
- Limited Liability Company: Your assets are protected from legal liability.
- Corporation: You are offered tax benefits but are fully liable for any legal disputes.
What Rights Does Having an Ownership Interest Give Me?
You are given five legal rights in real estate when you have an ownership interest in a property. These are commonly referred to as the bundle of legal rights.
These five basic rights include:
- Right of Possession: You reserve the property’s full or partial ownership rights as the legal titleholder. However, this does come with some caveats. For example, you are still required to pay taxes, HOA fees, and a mortgage if you financed the home with a loan. Failing to pay any of these obligations could result in the loss of possession of your home.
- Right of Control: You have the right to do whatever you want with the property as you wish, as long as it does not violate state or federal law or local governing ordinances, such as HOA rules.
- Right of Enjoyment: You have the right to enjoy and do whatever you want on the property as you wish, as long as it does not violate state law or local ordinance.
- Right of Disposition: You have the right to sell the property as you see fit.
- Right of Exclusion: You have the right to exclude access to your property from whoever you see fit, excluding law enforcement who have a proper warrant.
How Do I Transfer Ownership Interest in a Property?
There are two ways to transfer ownership interest of a property:
- Grant Deed: Transfers ownership of the property with some protection against a competing title claim.
- Quitclaim Deed: Transfers ownership of the property with no protection against competing title claims or existing liens.
Depending on state law, the level of protection each deed provides will differ. In general, grant deeds are commonly used in most traditional real estate transactions and investments, where investors and homebuyers want to be protected against competing titles. Quitclaim deeds are commonly used by family members and people familiar with each other and trust their partners in the transfer.
How Does Having Ownership Interest In a Property Affect First-Time Home Buyers?
Having an ownership interest in a property in the last three years before the close of your new home will prevent you from accessing first time homebuyer programs, such as FHA loans, down payment assistance, and closing cost assistance.
It does not matter if your ownership interest in a home was having sole ownership or a tiny investment. As long as you are on the deed and have an ownership interest in a property, then you cannot qualify for a first-time home buyer program.
Ownership interest provides a useful outline of what rights and liability your ownership in a property carries.
This is valuable information for a first-time home buyer because it can affect your ability to qualify for an FHA loan. Similarly, as an investor, your ownership interest will determine what level of ownership and liability each property you invest in carries.
And now you know what ownership interest in a property is and how ownership interest in a property can be a benefit and a limitation, depending on your situation.