Shared Equity Agreement Explained. At the forefront of innovation, shared equity agreements offer a unique perspective on homeownership dynamics. As the landscape of American home financing evolves, many homebuyers seek innovative financing options. As one lending solution, shared equity agreements allow lenders and financial investors to obtain an equity stake in a property alongside the property owner. Anyone with a lump sum of money can invest cash in exchange for a portion of a homeowner’s equity.
Many times, one party cannot singlehandedly qualify for a loan. Therefore, a lender or a family member steps in to help. With the current housing affordability crisis, many potential homeowners are willing to take the risk to bridge the gap between renting and ownership. Equity agreements work by redefining the roles of ownership: the investing owner and the occupying owner. In essence, a financially strong investor pays a borrower upfront in exchange for their future home equity, and since there are no monthly payments attached, a shared home equity agreement is technically not categorized as a loan.
Unpacking the Mechanics of Shared Equity Agreements.
Two parties agree to purchase a property.
- The occupying owner.
- The investment owner.
- One buyer, the occupying owner, purchases a percentage of a property‘s appraised value, and another entity or investment group, the investment owner, holds the remaining shares.
- Shared equity agreements with risk adjustments typically favor the lending party. The lender discounts the property’s value to protect their investment, countering market fluctuations or appraisal discrepancies.
- The investor or organization pays a lump sum payment or ongoing payments to the occupying owner.
- An agreed-upon percentage of the home’s value is given to the investment owner.
Property Rules and Paying off the Loan.
- The occupying owner retains ownership and responsibility for maintaining the property, including property taxes and insurance policies.
- All equity of any home appreciation or depreciation of the property value is shared with the investor.
- When the property sells or upon the contract term limit, a second home appraisal is performed.
- The investor receives their initial investment plus a share of the property’s appreciation, if applicable.
- Alternatively, homeowners may buy out the investor’s share to regain full ownership.
- These agreements may also include provisions for refinancing or selling the home before the agreed-upon term ends.
- The loan is payable upon either the sale of the home or at the point when a predetermined period elapses.
Understanding Home Value
Shared equity agreements work best when equity, the home’s current value, increases. When a shared equity agreement financed investment property decreases, both parties share the losses. Therefore, following the golden rule of real estate is imperative: location, location, location. Purchasing a property with the home’s future appreciation at the forefront is vital. Commonly, occupying owners perform home improvements to boost their home’s value further.
Since the home’s future value determines the terms of a home equity-sharing agreement, there are lower initial costs for the occupying owner. In this case, the investment owner provides the initial upfront capital.
Meanwhile, with home equity mortgages and home equity lines of credit, homeowners unlock the current value of their home. These loans have set repayment schedules and terms, whereas shared equity agreements often allow for more customized repayment structures.
Of course, lower initial costs and repayment flexibility sound great, but since potential long-term property value varies case by case. Buyers may ultimately lose more money in the long run since shared equity regularly favors the investment owner.
Shared Equity Agreements are Different than Home Equity Mortgages.
Untangling the jargon of loan products is undoubtedly a challenge. Leveraging home equity is a complicated process. However, homeowners who capitalize on the financial benefits of equity financing access some of the cheapest money on the lending market, making their efforts well worth it. All home equity loans work to leverage a property’s value and provide cash to the homeowner. Borrowers agree to repayment plans before assuming this additional debt.
In the same way, traditional loans work, so do home equity loans. Borrowers make fixed monthly mortgage payments in unison with established interest rates. Home equity loans come in all shapes and sizes. Many homeowners use reverse mortgages, cash-out refinances, and home equity lines of credit (HELOCs) to access money through leveraging home equity.
Shared Equity Agreements: Costs & Repayment
In the modern landscape of shared equity, upon entry, borrowers can expect to pay origination fees anywhere from three to five percent of the home equity investment, in conjunction with an appraisal fee, which is unregulated and can run up to $1,250 in some cases.
Additionally, there are home inspection fees, title, and escrow services, which can range between two to nine hundred dollars each. Once the homeowner either reaches the end of the agreement or is ready to exit, they frequently pay for all of these services again. Not to mention, when the property sells, the occupying owner typically pays the real estate commission.
Shared equity mortgages finance properties in which the borrower and the lender obtain an equity stake. Therefore, careful consideration and inspection of the contract are vital. Especially considering that shared equity finance agreements often favor home equity-sharing companies rather than the borrower. Considering the fees, qualification requirements, and risk adjustments associated with shared property ownership, buyers must diligently vet the investing owner by checking customer reviews, online ratings, and any available integrity-checking resources.
Cons of Home Equity Agreements
Not every lending solution is rainbows and butterflies, and home equity agreements have their fair share of drawbacks. Here are a few considerations.
Borrowers won’t typically access shared equity agreements through established banking institutions because most mortgage lenders and large banking institutions do not offer them. In the traditional lending industry, regardless of which type of loan a borrower chooses, income requirements, credit card debt, credit score requirements, and proof of consistent employment are standard lending practices for loan eligibility. In contrast, shared equity agreements operate within the realm of unregulated lending. Investment companies are allowed to write the terms of each loan case-by-case. Young companies and investing agencies often access funding through venture capitalists and firms representing them.
Many buyers in today’s market don’t qualify for a traditional mortgage.
On the one hand, shared equity agreements open a league of property availability that a single homebuyer may not be able to access solely; on the other hand, the occupying owner will have limited control over the property, and selling the property is complicated. With the housing crisis lingering, buyers must ask themselves a serious question. Is the gamble of trading a portion of your home upfront in exchange for the hopeful increase in the value of your home over time worth the risk? The actual cost of a home equity agreement is vastly different since the market is unregulated, and future home equity is not an exact science.
At What Point Is a Traditional Loan a Better Option?
Welcome to the realm of secured and governed financing. Loan officers and brokers have a variety of loans to finance the home-buying process. A homebuyer with sound credit and financial integrity can utilize a variety of lending opportunities that are more buyer-friendly than a shared equity finance agreement.
Professional lenders offer diverse portfolios of buyer-friendly loans. Take, for instance, the practice of taking a small personal loan to finance a down payment. Alternatively, using gift money from friends or family for loan financing is especially beneficial to homebuyers. The bottom line is that mortgage lenders offer creativity. After all, they are experts in efficient home purchasing.
Predominately, traditional lending is the safest option, and the banking rules of conduct both secure lenders and protect borrowers. Additionally, many loans are government-backed, making these loans and the properties they insure steadfast, and those who offer them to the public are well-regulated. On the other hand, shared equity agreements are less secure and offer very little protection to the occupying owner.
Mortgage Lenders Offer Reputable Lending Insight.
Lending experts help borrowers decipher the fine print of loan products available. Many loan officers offer educational materials to help borrowers navigate the comprehensive borrowing process. From the concept of shared equity agreements to the implications of unregulated lending territories, consulting with a professional loan officer always pays off. Dive in and discover whether or not shared equity agreements or traditional lending practices offer the solution to home financing you’ve been searching for.
The steps are simple:
1. Schedule a Call: An experienced loan officer can discuss your lending needs and guide you through the possibilities.
2. Get Approved: We’ll help you through the mortgage application process and facilitate the steps for approval.
3. Exhale: Put your feet up and feel secure knowing you made the best decisions about your home loan.
With proper guidance, you can get your first home, accommodate your growing family, and start that renovation project—whatever goal is on the horizon. An alliance with Mortgage Insiders will give you the confidence to know that your mortgage loan is setting you up for financial success. Mortgage Insiders offers today’s latest financial news and mortgage trends. Check out their channel for current events.
