What Is a Shared Equity Mortgage?
Definition and Examples of a Shared Equity Mortgage
A shared equity mortgage is a type of financing program that assists homebuyers with the upfront costs of buying a property. These programs are generally offered by nonprofit organizations, municipalities, or private investors. They're designed to make homeownership more affordable.
These mortgages help to lower the loan’s balance, as well as the monthly mortgage payments, because they often contribute to the down payment on a buyer’s home purchase.
What Is a Shared Equity Mortgage?
An organization, investor, or municipality lends a buyer all or some of the required closing costs, down payment, or a portion of the purchase price in a shared equity mortgage. The buyer agrees to share the eventual sales profits of the property in exchange for this money. This is usually a percentage of the sales price or the appraised value of the home.
Shared equity mortgages are also sometimes called “partnership mortgages” because the homebuyer has what amounts to a silent partner in their home purchase and its eventual sale.
- Alternate name: Partnership mortgages
How a Shared Equity Mortgage Works
The homebuyer typically won’t owe the lender any payments until they refinance the loan or sell the house. They might be required to live in the home a certain number of years.
Some shared equity mortgage programs put a cap on how much the homeowner can sell the property for, or even limit to whom they can sell it based on the buyer’s income. This condition is designed to ensure that housing in certain areas remains affordable to local residents.
Pros and Cons of Shared Equity Mortgages
There are many benefits to shared equity mortgages, especially for first-time homebuyers and those struggling to get their foot in the door of homeownership. But not everyone is comfortable with that ownership stake in the property's eventual sale.
Helps homebuyers with little savings to afford a house
Might cover down payment and closing costs entirely
Can increase housing affordability in areas where it’s needed
Can lower local delinquency and foreclosure rates
Can help buyers build equity to use toward future home purchases
Homeowner gets less of the profits when the home is sold
Can limit homeowner as to what they can list the home for when they sell, or who they can sell it to
These programs can significantly reduce the costs of buying a home—sometimes eliminating the down payment and closing costs entirely. Shared equity mortgages can also lower a homeowner's monthly payments and help ensure housing in a particular geographic area is more affordable on the whole.
A study from the Urban Institute shows these mortgages help buyers build equity to purchase higher-priced homes later on.
Shared equity programs can also help buyers avoid the costs of private mortgage insurance (PMI), which can be required when a down payment is less than 20% of the home's sales price. PMI won't be required if the down payment provided by the investor is significant enough.
These programs nonetheless limit how much you can make off the sale of your home.
Shared equity programs aren’t available everywhere, and options can vary greatly depending upon your location.
Private Shared Equity Mortgage Programs
Shared equity products are emerging from private companies in addition to the shared equity mortgage programs offered by municipalities, nonprofits, and other similar organizations. Some of these options include Haus, Noah, Point, Unison, and OWN Home Finance.
Some of these companies 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.
Each organization can take a slightly different approach, but they all follow the general shared equity model, reducing the costs of buying a home either upfront or through lower monthly payments.
Is a Shared Equity Mortgage Right for You?
Shared equity mortgages can be a good option if you’re a first-time homebuyer, have a low income, or just don’t have much saved up for a down payment or for closing costs. They do come with a long-term cost, however, so make sure you weigh the full consequences of sharing your home’s equity with an outside investor or party.
Home equity can be a valuable financial tool later in life, allowing you quick access to cash or money to support home improvements, retirement, or other goals. Be sure to take the full picture into account if you're considering a shared equity mortgage.
You can apply online via the organization’s website to get a shared equity mortgage. You’ll have to fill out a form to see if you qualify for the program. As with other mortgage lenders, you’ll need to provide personal information. Eligibility and approval are based on your income and household size, as well as the amount of the loan.
You might have to pay several fees if you qualify, such as origination or appraisal fees, too.
- A shared equity mortgage program assists would-be homebuyers with the costs of purchasing a property in exchange for a stake in the property’s equity when it’s eventually sold.
- These mortgages can come with quite a few restrictions, such as how much the property can eventually be sold for and to whom.
- The idea is to increase housing affordability in certain areas, and these programs are often offered by nonprofits and municipalities.
- These programs are not widely available.