What Is a Home Equity Sharing Agreement?

A home equity sharing agreement is a useful way to tap into home equity without going into debt. An investment firm will receive ownership of a percentage of your home in exchange for cash. You won’t have to make monthly payments toward a loan or worry about the draw period concluding for a line of credit. These agreements present several advantages, but it’s good to know the pros and cons before committing to this method of tapping into your home equity.

How Does a Home Equity Sharing Agreement Work?

These agreements involve trading a stake in your property for equity. While most companies only initiate these agreements for single-family primary residences, some investment firms also offer these agreements for second homes and investment properties.

Firms offering these agreements look at your home’s value and will require the homeowner to pay for an appraisal. Then, you have to decide how much equity you want and how much of your home’s value you are willing to give to the company. 

Assume a home is appraised at $1 million, and the homeowner wants to borrow $200,000 from their home equity. A company offering home equity sharing agreements will give you the $200,000. However, you will have to give up 20% of your home’s equity position. 

If the property rises from $1 million to $1.5 million, the investment company’s equity position grows from $200,000 to $300,000. If your home’s value grows by 50%, the firm’s position also grows by 50%. 

Pros and Cons of Home Equity Sharing Agreements

These are some of the advantages and disadvantages of using a home equity sharing agreement.

Pros 

• No credit score requirement: You can get a home equity sharing agreement even if you have a bad credit score. 
• No monthly payments: You don’t have to make monthly payments toward a loan to tap into your home’s equity. The lack of additional loan payments can help people who have tight finances.
• Your home’s value may stay flat: If your property’s value stays flat or slightly declines, you can make a profit if you buy back the investment firm’s stake.
• You don’t need a good debt-to-income (DTI) ratio: Mortgage lenders are strict about debt-to-income ratios, but you don’t need the best DTI ratio to get a home equity sharing agreement.

Cons

• The extra appraisal: You have to pay for an appraisal even if the company offering these agreements doesn’t do business with you.
• Lose home appreciation: The investment firm benefits from any home appreciation. You’ll still gain value within your position, but you are leaving money on the table if an investment firm has some of your home equity. 
• Difficult terms: Some of these arrangements have complex terms that aren’t easy to understand. You will have to read the fine print.
• Rules and regulations: These contracts may prevent you from renting your property or getting a refinance. The rules vary for each company.

What Does a Shared Equity Agreement Cost? 

The cost of a home equity sharing agreement depends on how much equity you want to access. You will have to pay a 3% to 5% fee based on how much cash you receive from the company. Asking for more equity will increase the amount you must pay. The homeowner is also responsible for the appraisal fee.

Home equity sharing agreement companies also deduct the appraiser’s value to mitigate risk. For instance, a company may treat a $1 million property as a $950,000 home. It removes 5% of the home’s value and then uses this new figure to determine its stake after giving you funds.

How to Get a Home Equity Sharing Agreement

Home equity sharing agreements can get complex, but you won’t have to worry about monthly loan payments. These arrangements are also available for people who have low credit scores. Here’s what you need to know about getting a home equity sharing agreement. 

Research and Compare Different Providers

Several companies offer home equity sharing agreements, but you shouldn’t rush to work with the first provider you find. Reviewing each provider’s terms and contacting the top picks can help you make a better decision.

Determine How Much Equity You Are Willing to Share in Exchange for Funds

Assess your financial health and determine how much equity you want to give. You should also consider whether you can borrow money through other means. For instance, most people don’t qualify for $200,000 personal loans. However, you might be able to qualify for a $50,000 personal loan and then borrow $150,000 from a home equity sharing agreement company. This arrangement lets you preserve more of your equity.

Understand the Terms and Conditions of the Agreement

Each company has terms and conditions for their agreements, and some of them can get complex. The contract should outline how repayment and profit-sharing work. Homeowners should also consider the total expenses associated with these agreements and compare multiple offers.

Consult with a Legal Adviser to Review and Finalize the Agreement

A legal professional can review the agreement and determine whether it’s fair. You don’t want to be surprised by any of the fine print. An adviser can finalize the agreement and ensure the contract is as intended.

Sign the Agreement 

All parties involved must sign the agreement. It is a good idea to review the document one final time before signing it.

Keep Detailed Records of any Payments and Communications 

Homeowners should stay on top of any communications between them and the company with the agreement. It’s good to monitor payments and other terms.

Where to Get a Home Equity Sharing Agreement

You can compare companies that offer home equity sharing agreements and decide which one is right for you. Assessing the best choices in the industry and knowing your needs can lead to a better decision.

Getting a Home Equity Sharing Agreement

Home equity sharing agreements can help people who have low credit scores and don’t want more debt. However, these agreements can get complicated, and you will have to compare each firm’s terms and fees. Knowing what you want as a homeowner can help you find the right arrangement for your property. 

Frequently Asked Questions