Shared equity programs can provide an excellent opportunity for affordable homeownership. They’re often run by government or non-profit organizations to provide first-time or low- to moderate-income buyers access to housing at prices substantially lower than otherwise available in a market.
Several types of shared equity programs are available, but they usually include a requirement that the homeowner and program sponsor “share” in a home’s appreciation in value when the owner sells the property.
If you’ve been thinking of buying a home but feel like this goal may be out of reach, a shared equity mortgage might be the solution.
What Is a Shared Equity Mortgage?
Shared equity mortgages are primarily designed to help first-time buyers. They are also designed to help people who could not otherwise afford to buy a home to get on the property ladder.
This is achieved through the provision of a lump sum payment that can be applied towards the down payment on your mortgage. You see, a shared equity mortgage allows a qualifying homeowner, to receive a lump sum payment that can be used ‘top up’ the down payment, without taking on debt or monthly payments. In exchange for these funds, the buyer agrees to repay the loan when the home is sold, and to share a predetermined percentage of the future profits you make on the house. This is often written as a percent of the equity from the future sales price, or the appraised value of the home.
These programs are typically offered by nonprofits, municipalities, or private investors and they are designed to make the dream of owning a home more accessible.
These agreements are typically structured such as the entity you sign the agreement with will make money if your home value increases during the term you agreed to, typically between 10 and 30 years. These agreements can also include protection against losses in if your home loses value during that time, with the investing company sharing the losses with you.
Shared equity mortgages are also called “partnership mortgages” because the buyer has what amounts to a silent partner in their home purchase and its future sale.
How a Shared Equity Mortgage Works
In most cases, the homebuyer won’t owe the lender any payments unless they need to refinance the loan, or until they sell the house. They might also need to live in the home a certain number of years before they can take either of these actions.
Some shared equity mortgage programs put a cap on how much the you’ll be able to sell the home for in the future, or even place limits on who you can sell it to, based on the buyer’s income. This rule is more common with non-profits and municipalities as it is designed to ensure that people who live in a certain area can afford to stay there, and that owning a home remains an option for people who are in the middle or lower income range.
Pros and Cons of Shared Equity Mortgages
There are many benefits to shared equity mortgages. If you are thinking of buying a home for the first time, or struggling to get your foot in the door, you have much to gain from these programs.
Pros
- Helps buyers with little savings to afford a home
- Allows buyers to reduce their overall housing costs
- Can help buyers to afford more home than they could otherwise afford on their own
- Can help buyers avoid the cost of PMI
- Can increase access to housing or home ownership in places where it’s needed
- Can help buyers build equity to use toward future home purchases
- Protects homeowners in the event home values decrease
Cons
- Homeowner realize less of the profits when the home is sold
- These programs have become rare and can be difficult to secure
These programs can reduce the costs of buying a home to a large degree. They may even help a buyer reduce their down payment to as little as five percent, or less.. Shared equity mortgages can also lower monthly payments and help ensure that housing in a given city or town is more affordable on the whole.
Shared equity mortgage programs can also help buyers avoid the costs of private mortgage insurance (PMI). Some lenders require PMI when a down payment is less than 20% of the home’s sales price. But if the investor or shared equity lender provides enough funding to cover the down payment, PMI won’t be required by the primary mortgage lender.
What you give up with these programs is full stake in the future profit. Again with these programs you add partner with an ownership interest in the home, and when you sell, you must split the equity, the appreciated value with this entity.
Private Shared Equity Mortgage Programs
Shared equity mortgage products are now cropping up from private sources as well. Some of these options include: Landed, Unison, Haus, Noah, Point, and HomeTap.
Private versions offer a range of new perks. Some will match a portion of every dollar you put toward the upfront costs of your home, while others share in certain parts of your equity, some even after you’re in the home.
Is a Shared Equity Mortgage Right for You?
Shared equity mortgages can be a good option if you’re buying a home for the first-time and don’t have the full twenty percent to put down, if you want to stretch your housing budget to afford more home now, or if you are looking to buy in a higher cost market and have an income that is below that required to purchase a home in the area.
While the funding they provide doesn’t include any upfront costs, there is the long-term cost of their share of your home’s equity. While having the full measure of your home’s equity can be a helpful tool for your finances later in life (it can allow you quick access to cash, or funding to support home projects, a pathway to retirement, funding for your children’s college tuition, or any number of other goals), getting the home you want now while reducing your monthly housing expense to free up money for other expenses, savings or other investments has it’s own benefits.
You can apply online via the organization’s website to get a shared equity mortgage. You’ll first have to fill out a form to see if you qualify for the program. As with other mortgage lenders, you’ll need to provide information about your income, credit, debt load, and more. Your final eligibility and approval are based on your income and household size, as well as the total amount of the loan and in most instances the home itself will need to qualify for the program.
There may also be fees involved if you are approved. You can expect to pay small service fees for the labor and process, as well as origination fees for the loan, or appraisal fees for the home.
If you, or someone you know is considering Buying or Selling a Home in Columbus, Ohio please give us a call and we’d be happy to assist you!
The Opland Group Specializes in Real Estate Sales, Luxury Home Sales, Short Sales in; Bexley 43209 Columbus 43201 43206 43214 43215 Delaware 43015 Downtown Dublin 43016 43017 Gahanna 43219 43230 Grandview Heights 43212 Galena 43021 Hilliard 43026 Lewis Center 43035 New Albany 43054 Pickerington 43147 Polaris Powell 43065 Upper Arlington 43220 43221 Westerville 43081 43082 Worthington 43235
