A shared equity agreement (SEA), also known as a home equity investment, partnership mortgage, or shared equity mortgage, is a contract between two or more parties who agree to share a property’s ownership. An SEA is one of the multiple ways that people can leverage home equity.
One party is akin to a silent investor in a business: the investor, known as the owner-investor, puts up cash for a down payment on a home or an equity stake in a home. The other party, known as the owner-occupant, receives the benefit of the cash as a down payment or lump sum.
Typically, the owner-investor has a financially stronger position or better credit than the owner-occupant.
How Does a Shared Equity Agreement Work?
Under a shared equity agreement, the owner-occupant agrees to pay a certain percentage or all of the mortgage, property taxes, homeowner’s insurance, and other expenses. The owner-occupant might also have to agree to a cap on how much the property can be sold for or even to whom it can be sold (depending upon the prospective buyer’s income).
The owner-investor agrees to provide a lump sum of cash or down payment in exchange for profits when the owner-occupant moves or refinances. If the owner-investor is also paying a portion of the mortgage and interest, they can often deduct that interest from their taxable income.
Shared Equity Agreement Models
Shared equity agreements come in two forms, and with each, you sell a share of your home’s future value in return for a lump sum of cash. Here is how the two models work:
- Share of appreciation model. With this model, you would be required to return the full invested amount to the investor when you sell the property, refinance, or the contract ends.
- Share of home value model. If you choose this model, you pay your investor a fixed percentage of your home’s value once the contract ends, or you refinance or sell the property.
Benefits of a Shared Equity Agreement
In certain situations, a shared equity agreement can offer a financial break that makes homeownership possible. Benefits of a shared equity agreement include:
- Lowered rates of delinquency and foreclosure. Because the home equity agreement makes homeownership more affordable for the buyer, that extra help means they will have an easier time meeting their loan obligations.
- Makes home purchases more accessible for buyers. For people who don’t have adequate savings for a downpayment, a home equity agreement helps them get past the initial hurdle of coming up with a substantial sum to purchase a home. It can also cover down payment and closing costs.
- It helps first-time buyers start building equity. Even though the equity is shared in a home equity agreement, the owner-buyer still keeps a portion of the equity built up in the home. Especially in strong markets, homeowners can leverage that equity in the future to purchase a home outright, or for another purpose.
Drawbacks of a Shared Equity Agreement
There are also some downsides to a shared equity agreement:
- Shared equity agreements are not widely available.
- You get less of the profits when you sell the home.
- The agreement can limit how much you can list the home for or who you are allowed to sell to.
- Before entering a shared equity agreement, weigh all sides to ensure you don’t lock yourself into something you’ll regret later. It’s a good idea to speak with a financial advisor to help you make this important decision.
Who Can Benefit from a Shared Equity Agreement?
A shared equity agreement will not remove monthly payment obligations for homeowners who struggle to meet payments on mortgages, auto loans, medical bills, or credit card debt. Still, it can help lower them or provide a way of trading a percentage of equity for cash to pay down high-interest debt.
Borrowers looking to purchase a new home and have a high debt-to-income ratio may find a shared equity agreement makes getting a mortgage possible.
Homeowners, or buyers, who do not want to stay in their homes forever and are looking at them as investment stepping stones can benefit from the extra cash flow and options a shared equity agreement provides. Because many of these vehicles specify the length of the agreement, if you wish to remain in the home indefinitely, you might want to consider another option.
Alternatives to a Shared Equity Agreement
There are several other methods to tap into your home equity, home equity loans, home equity lines of credit (HELOC), cash-out refinance, and, for borrowers over 62, reverse mortgages. If you have low savings or poor credit but want to buy a home, a shared equity agreement might just be the way to go.
Finance of America Reverse LLC is a reverse mortgage lender that offers reverse mortgage loans. It does not offer shared equity agreements or require any customer to obtain this product. This article is not a solicitation for any shared equity agreements. This article provides general information about shared equity agreements that you may wish to consider and is based on general discussions with third-party financial professionals.
This article is intended for general informational and educational purposes only, and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.