Getting a mortgage and being a homeowner is a big deal. And depending on where you want to live and the state of the housing market (if it’s a seller’s market or not), it can be an uphill battle to find and purchase a home in your price range.
A loan alternative – like a shared equity mortgage – could be just the thing to make homeownership affordable, especially if you are a low-to-moderate income home buyer.
We’ll explain what a shared equity mortgage is. And we’ll share how it works and the requirements to qualify.
What Is a Shared Equity Mortgage and How Does It Work?
The main benefit of a shared equity mortgage is that buyers get help owning a home they might not otherwise be able to afford.
For the most part, shared equity mortgage programs are designed to assist low-to-moderate income home buyers or buyers who meet other qualifications (we’ll get into the other qualifications later).
With a shared equity mortgage, the home is co-owned by the home buyer (the owner-occupant) and an owner-investor (the co-investor). The co-investor can be a lender, a municipality, a nonprofit or a private investor.
Sometimes, a shared equity mortgage is an arrangement between a home buyer and a person who’s willing to help them buy their home, like a parent or guardian.
With a shared equity mortgage (or partnership mortgage), the home buyer and co-investor usually share the initial financial responsibility of a home, such as the down payment and closing costs. According to the arrangement, the buyer and the co-investor share the home’s equity when the home is sold. The percentage of the profits the co-investor receives is agreed on when the mortgage is created.
Typically, the co-investor pays a portion of the buyer’s down payment, which lowers how much the buyer has to borrow, and that lowers their monthly mortgage payments. Some lenders and programs even offer shared equity loans that come with no down payment.
The role of the co-investor
The co-investor contributes money so the buyer can purchase a home. Because of their contribution, the co-investor becomes a co-owner of the home.
While the co-investor is generally a lender or an entity, parents or guardians can also take on the role of co-investor. In the case of parents or guardians, they benefit as co-investors because their contributions aren’t subject to gift taxes.
The role of owner-occupant
With a shared equity mortgage, the buyer is the owner-occupant and shares ownership of the property with the co-investor. The buyer isn’t the sole owner of the property but shares the risk (potentially losing money if the value of the house goes down), equity and initial financial responsibility with the co-investor.
How much of the equity is shared and how much each party must contribute as a down payment can vary. The owner-occupant must, however, reside in the home. The arrangement is spelled out in the mortgage agreement.
What Are the Different Types of Shared Equity Loans?
There are other kinds of shared equity loans out there. Each one is defined based on who the co-investor is. Here are some examples of other shared equity loans and programs:
Community land trusts
A community land trust (CLT) gives a community control of a piece of property. A CLT aims to ensure a supply of affordable housing in a community.
With a CLT, ownership of the land and the home are separated. The buyer purchases the home, and the CLT owns the land the home sits on.
CLTs are nonprofits run by a board of directors. The board can be made up of community members, residents or others. The CLT has to approve its buyers. When the house resells, the owner walks away with a predetermined portion of the sale’s proceeds.
Limited equity cooperatives
With a limited equity cooperative (LEC), a group of owners each owns a share of the property. The price of each share is predetermined so each share stays affordable when sold.
These projects typically include government assistance, like special low-interest financing or a housing subsidy. Sometimes the projects are set up in multifamily developments, but they can also be townhouses, mobile home parks or other types of housing.
Deed-restricted and below-market rate homeownership programs
A deed-restricted or below-market rate homeownership program creates affordable housing through government initiatives or private donations.
Deed restrictions stay in place to keep resale prices affordable and can include a maximum resale price.
Sometimes a resale price is aligned with an area’s median income.
For instance, if the price of a home was $100,000 when it was bought and the community’s median income increased by 20% since the purchase, the resale home price would be set at $120,000.
Deed restrictions can also limit buyer eligibility. A deed restriction might specify that home buyers must have an annual income no greater than 80% of the area’s median income.
The Department of Housing and Urban Development (HUD) sponsors housing counseling agencies that offer free or low-cost advice on housing and mortgages.
What Are the Pros and Cons of a Shared Equity Mortgage?
There are benefits and drawbacks you’ll want to consider if you’re thinking about getting a shared equity mortgage. We’ve outlined a few of the major pros and cons:
- You can become a homeowner: Shared equity programs can open the doors of homeownership to aspiring home buyers who wouldn’t have been able to afford a home on their own.
- Reduces risk in a bad market: Let’s say you need or want to sell the home, but the housing market is unfavorable to sellers. Because you paid less to buy the home and have less equity, you’ll lose less money on the sale than if you were the sole owner of the property.
- Better interest rates: You can use the money you received for the down payment to make an even larger down payment. The larger the down payment you make, the higher your chances will be that a lender will offer you a lower interest rate on the mortgage.
- No PMI: Depending on how much the co-investor contributes, a buyer can avoid paying private mortgage insurance (PMI). A down payment of 20% or higher is required to avoid PMI.
- Lower monthly payments: The more money you put down, the less you have to borrow. That means lower monthly mortgage payments.
- Not available in your community: Not all lenders offer shared equity mortgages and these programs are not easy to find.
- Fewer options: Publicly subsidized shared equity properties in your area can be limited to certain buildings or developments and qualifying for the programs can be difficult.
- Limited equity: If you’re looking to build up equity, a shared equity mortgage might not be right for you. With this agreement, equity is typically shared with the co-investor.
- Limited profit from the home’s sale: Your co-investor is entitled to a share of the profit you earn from selling the home. And sale prices may be capped as part of a program’s effort to keep housing stock affordable.
Is a Shared Equity Mortgage Right for You?
A shared equity mortgage might be right for you if you have:
- A low-to-moderate income: Shared equity programs generally require a certain level of income.
- Little to no savings: A primary benefit of a shared equity mortgage is that it allows buyers to pay less upfront to buy a house, including getting help with a down payment.
- Financial support from family: Find family members who are willing to become co-investors.
How Do I Qualify for a Shared Equity Mortgage?
Shared equity mortgage programs are typically earmarked for low-to-moderate income buyers. In general, buyers must be looking at primary residences.
Depending on the lender, there may be additional qualifications, including having a qualifying disability, being 62 or older, or living in an underserved community.
Each program will have its own requirements. Some may have no down payment mortgages, while others will require a small down payment.
To apply, you will likely need:
- Identification: Social Security number, driver’s license or government photo I.D. or passport
- Proof of income: W-2s or 1099s, pay stubs and recent tax returns
- Verification of your assets: Bank statements or other financial documents
Financial Support Can Help You Become a Homeowner
Is a shared equity mortgage right for you? With some financial support from your community, a lender or other investor, you might be able to become a homeowner faster than you thought possible.