A shared equity mortgage is a type of financing program that assists people with the upfront costs of buying a piece of real estate, such as the down payment on the buyer’s home purchase. These programs are mainly offered by nonprofits, municipalities, or private investors. They're designed to make the dream of owning a home something that more people can afford.
If you are have been thinking of buying a home but feel like this goal may be out of reach, a shared equity mortgage might be able to help. Getting one of these loans can help to lower the full balance of your home loan as well as the monthly mortgage payments by paying some of the upfront costs.
What Is a Shared Equity Mortgage?
A shared equity mortgage is when an organization, investor, or municipality lends a buyer all or some of the funds they need to buy a home. These can be closing costs, a down payment, or a portion of the total purchase price. The buyer agrees to share the future sales profits in exchange for this money at the start. This is often written as a percent of the sales price or the appraised value of the home.
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.
- Alternate name: Partnership mortgages
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 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.
Helps people with little savings to afford a house
Might cover down payment and closing costs in full
Can increase access to housing or home ownership in places where it’s needed
Can lower local default 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
Limits as to what price the home can sell for, when it can be listed, and who can buy it
These programs are rare and hard to secure
These programs can reduce the costs of buying a home to a large degree. They may even help a buyer get rid of the down payment and closing costs in full. 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.
A study from the Urban Institute shows that shared equity mortgages help buyers afford to purchase higher priced homes later on in life.
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 needed by other lenders.
What you give up with these programs is full stake in the future profit. They put a hard limit on how much you can make off the sale of your home.
Shared equity programs aren’t always easy to come by, and options can vary greatly depending on where you are looking to buy.
Private Shared Equity Mortgage Programs
Shared equity mortgage products are now cropping up from private sources as well. Some of these options include Haus, Noah, Point, and OWN Home Finance.
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.
Each private source of shared equity products might differ slightly in their approach, but they all follow the standard model. They reduce 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 buying a home for the first time, if you have a low income, or if you simply don’t have much saved up for a down payment or for closing costs. They do come with a long-term cost, so make sure you weigh all the outcomes and risks of sharing your home’s equity with an outside party.
Having a measure of home equity can be a helpful tool for your finances later in life as well. It can allow you quick access to cash, or funding to support home projects, a pathway to retire, or any number of other goals.
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.
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.
- A shared equity mortgage program assists people with the costs of buying real estate in exchange for a stake in the home's equity when it is later sold.
- These mortgages can come with quite a few rules, such as limits on the future sale price and on who may buy it.
- One of the goals of these programs is to increase the level of housing affordability in certain areas.
- These programs are not common or easy to secure.