The shared equity mortgage is becoming an increasingly popular option for homebuyers seeking more affordable ways to own property. In today’s high-priced real estate markets, this alternative financing solution offers a more accessible route to homeownership. Shared equity mortgages allow buyers to share the risks and rewards of homeownership with third parties, often reducing the initial down payment burden and monthly mortgage payments. Below, we’ll explore everything you need to know about shared equity mortgage companies, how they operate, and how they could help you secure your dream home.
What is a Shared Equity Mortgage?
A shared equity mortgage is a type of loan that allows a third party, often a government entity, housing association, or a private lender, to share in the equity of the home. This means that the buyer does not have full ownership of the property but shares it with the lender or investor. In return, the buyer benefits from lower initial costs, such as reduced down payments and monthly mortgage payments.
In a typical shared equity arrangement, the lender or investor provides a portion of the down payment or covers part of the cost of the home, which helps make the property more affordable. When the home is eventually sold, the investor receives a percentage of the profit based on the initial investment.
Key Benefits of a Shared Equity Mortgage:
- Reduced down payment: Homebuyers typically only need to put down a smaller percentage of the purchase price.
- Lower monthly payments: The buyer’s mortgage is reduced since the investor covers a portion of the home’s cost.
- Easier qualification: Lower income thresholds may make it easier for first-time buyers to qualify.
How Do Shared Equity Mortgage Companies Work?
A shared equity mortgage company partners with homebuyers to co-invest in a property. These companies are designed to bridge the gap between traditional mortgage lenders and buyers who may not have sufficient upfront capital. By entering a shared equity agreement, buyers gain access to homes they might otherwise be unable to afford.
- Co-Investment: The shared equity mortgage company will invest a portion of the home’s cost, allowing the buyer to secure a lower loan from their mortgage lender.
- Equity Sharing: The company shares ownership of the property. If the property value increases, the company and the buyer both benefit from the appreciation.
- Repayment: When the home is sold or refinanced, the company receives its percentage of the appreciation or the agreed-upon share of the home’s value.
These companies typically operate in fast-growing real estate markets, where home values appreciate significantly over time, allowing both the buyer and the lender to profit from future gains.
Top Shared Equity Mortgage Companies to Consider
When considering a shared equity mortgage, it’s essential to choose the right company that aligns with your financial goals. Here are some of the top companies in the industry:
1. Unison
Unison is one of the leading shared equity mortgage companies in the U.S., offering buyers an innovative way to purchase homes. Instead of loaning buyers money, Unison invests alongside them, helping with the down payment in exchange for a share of the future appreciation of the home.
- How it works: Unison provides up to 17.5% of the home’s value toward the down payment. In return, the company receives a portion of the home’s equity appreciation when the property is sold or refinanced.
- Pros: No monthly payments or interest, making it easier to manage cash flow.
- Cons: The company shares in both the appreciation and depreciation of the home’s value.
2. Landed
Landed primarily helps educators and public sector workers purchase homes by providing down payment assistance through a shared equity model. This company co-invests with buyers, helping them afford homes in expensive markets like San Francisco, Los Angeles, and New York City.
- How it works: Landed provides up to 50% of the down payment, and in return, the company receives a portion of the home’s equity.
- Pros: Helps essential workers afford homes in high-cost areas.
- Cons: Limited to specific professions and regions.
3. Divvy Homes
Divvy Homes offers a unique rent-to-own model combined with shared equity financing. This company allows renters to accumulate equity as they make monthly payments, eventually transitioning into full ownership.
- How it works: Buyers move into the home as renters, and a portion of their monthly payment goes toward building equity. Over time, the renter has the option to buy the home outright.
- Pros: Low barriers to entry, flexible purchasing options.
- Cons: Renters need to maintain the home and make timely payments to qualify for ownership.
4. Loftium
Loftium is a shared equity mortgage company with a twist. It allows buyers to generate extra income by renting out part of their home on short-term rental platforms like Airbnb. In return, Loftium provides assistance with the down payment.
- How it works: Loftium invests in the down payment in exchange for a percentage of the rental income generated from short-term rentals.
- Pros: Homeowners can generate additional income to help cover mortgage costs.
- Cons: Only available in select cities where short-term rentals are in high demand.
Who Can Benefit from a Shared Equity Mortgage?
Shared equity mortgages are particularly well-suited for first-time homebuyers who may not have the financial means for a traditional 20% down payment. This financing option is also ideal for individuals in expensive real estate markets where home prices outpace wage growth, making it difficult to save for a down payment.
1. First-Time Homebuyers
Many shared equity mortgage companies, like Landed and Unison, cater specifically to first-time homebuyers. These programs make it easier for buyers to enter the market, especially in high-demand urban areas where property values are rapidly increasing.
2. Essential Workers
Programs like Landed are targeted at public servants, teachers, and healthcare professionals who may struggle to purchase homes in cities with high housing costs.
3. Buyers in Expensive Markets
For homebuyers in high-cost areas like New York City or San Francisco, shared equity mortgage companies provide an avenue to homeownership without requiring the full 20% down payment, which can be prohibitively expensive in such regions.
Pros and Cons of Shared Equity Mortgages
Pros:
- Lower upfront costs: Shared equity mortgages reduce the financial burden of a large down payment, making homeownership more accessible.
- Increased buying power: Buyers can afford homes in more expensive areas thanks to the co-investment by the mortgage company.
- No monthly payments or interest in some cases: Companies like Unison don’t require monthly payments, easing the burden on the buyer.
Cons:
- Shared appreciation: Homebuyers must share any appreciation in property value with the shared equity mortgage company, which can reduce potential profits.
- Limited market availability: Some companies only operate in specific geographic regions, which may limit your options.
- Potential loss if the market declines: If property values decrease, both the buyer and the shared equity company will share in the losses.
Is a Shared Equity Mortgage Right for You?
Deciding whether a shared equity mortgage is the right option depends on your financial situation and long-term goals. For many first-time buyers, especially those in expensive markets, shared equity mortgages offer a viable path to homeownership. However, it’s crucial to weigh the pros and cons carefully. Sharing future appreciation might reduce your long-term profit, but for those struggling to secure a home, the trade-off can be well worth it.