What Is a Shared Equity Mortgage?

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A shared equity mortgage allows someone to “share” ownership of a home with an investor who helps fund their down payment. The borrower gets to buy a home they otherwise may not have been able to afford, and in exchange, the investor receives a percentage of the home’s value as well as any future gains. In some cases, these programs can also help existing homeowners convert some of their home equity into cash.

Key takeaways

A shared equity mortgage is also known as a home equity contract or home equity sharing agreement.
You can typically only get a shared equity mortgage if you plan to live in the home as your primary residence.
They can be worth considering if you need down payment help or want to tap into your equity.

How does a shared equity mortgage work?

Just like with any home loan, a borrower takes out a primary mortgage and makes a down payment. The difference is that an investor also contributes a lump sum toward the home’s purchase price. In return, the investor will share in any profits from the home’s appreciation over time. Shared equity mortgages are often used to help limit homebuying costs for low and moderate-income borrowers, as well as first-time homebuyers.

Other things to know about shared equity programs:

The borrower won’t have to make any payments — not even interest — on the lump sum borrowed from the investor until they either sell or refinance the home. At that time, the borrower must repay the investor’s lump-sum amount in full. If the property’s value has increased since purchasing the house, the borrower typically also pays a percentage of that value increase to the investor.
The homeowner will have to make PITI payments on their primary mortgage, but they’ll be more affordable than they would’ve been without a shared equity mortgage in play.
The homeowner is still responsible for the home, including maintenance and repairs, paying property taxes and covering any costs involved with selling the home.

Types of shared equity arrangements

There are two types of shared equity agreements that cater to different needs:

Home equity sharing agreements that allow you to buy a house. These are for borrowers who need help covering their down payment. Today, both private investors and municipal governments use the real estate equity sharing model to offer down payment assistance to qualified buyers.
Shared equity agreements that allow you to tap your home equity. These may be called shared equity finance agreements or home equity investment loans. They cater to borrowers who want to tap their home equity, but don’t meet the requirements for a home equity loan or home equity line of credit (HELOC). This is the most common use for these products today, according to the Consumer Financial Protection Bureau (CFPB).

Shared equity mortgage example

Most shared equity programs require borrowers to give the investor a stake in the home that’s equal to that investor’s contribution. For example, let’s say that a city’s shared equity mortgage program pays $20,000 toward your $200,000 home purchase. You put down $20,000 of your own cash and take out a mortgage for the remaining $160,000.

Since the city’s contribution is 10% of the home’s purchase price, the city will hold a 10% stake in any future appreciation. If you later sell the home for $300,000, which represents $100,000 of appreciation, the city would get 10% of that ($10,000). You would also have to repay the city’s original $20,000 investment.

Beware

When you agree to a shared equity mortgage, the lender puts a lien on your home to secure its interests. This could limit your ability to refinance in the future.

Pros and cons of a shared equity mortgage

Pros

Increased buying power. With a shared equity mortgage, borrowers can afford to buy a more expensive property without raising their monthly payment costs.
Potentially eliminate PMI. With an investor’s contribution increasing your down payment amount, you have a better chance of avoiding PMI, saving you hundreds of dollars each year.
Reduced monthly mortgage payments. Shared equity agreements usually don’t require a monthly payment. However, by using these funds to make a larger down payment, borrowers can reduce their monthly mortgage payments.

Cons

Potentially high costs. Depending on your home’s future appreciation, a shared equity agreement could easily cost you tens of thousands of dollars when you refinance or sell the property.
Reduced wealth-building potential. By sharing your home’s appreciation with an outside investor, you limit your total financial gains from the property. If you can’t offset this loss through savings or other investments, it may seriously impact your ability to build wealth.
Limited eligibility. Shared equity mortgage programs are often only available to residents in certain areas who meet specific income requirements.

How to qualify for a shared equity mortgage

Many shared equity mortgage programs are offered by city or regional governments as a way to make homeownership affordable for lower- and moderate-income earners. They tend to come with income limits, as well as residency and property location requirements.

Private shared equity companies may have more flexible requirements, allowing borrowers of all incomes to receive down payment assistance in exchange for a share of the property’s future appreciation.

Read more about current minimum mortgage requirements.

How to get a shared equity mortgage in 3 steps

1. Gather the required documents

You’ll need many of the same documents you’d need to apply for a traditional mortgage, such as:

Proof of income (tax returns, paystubs, W2s, etc.)
Bank statements
Government-issued identification, such as a driver’s license, passport and Social Security card)

2. Compare shared equity mortgage lenders

Shopping around and comparing terms with different lenders can help you find the best deal. Some of the biggest companies operating in the shared equity lending space are Unison, Point, Hometap and Unlock.

3. Submit your application

Once you’ve chosen a lender or investor, send in an application along with the required paperwork. You’ll also need to pay closing costs, which may include a transaction fee and any third-party costs, such as appraisal fees.

Alternatives to shared equity mortgages

If you’re unsure if a shared equity arrangement is the right fit for you, consider these alternatives:

Low-down-payment loans
Community land trusts
Limited-equity cooperatives
Co-buying a property
Borrowing a down payment

Low-down-payment loans

Conventional loans allow borrowers to take on a mortgage with as little as 3% down. In addition, FHA loans, VA loans and USDA loans offer 0% to 3.5% down payment options to qualified buyers.

These loans will require larger monthly payments, but buyers get to keep up to 100% of their home’s appreciated value when they sell. If you can afford the monthly payment, a low-down-payment loan is a great way to get into a house, and it comes with fewer costs down the road.

Start comparing current mortgage rates today.

Community land trusts

People who buy a home through a community land trust get to buy the house at a significant financial discount. When it comes time to sell, the owner gets to keep some of the appreciation while the remainder is reinvested in the house to keep the cost of ownership low for the next buyer.

Limited-equity cooperatives

Most of the time, limited-equity cooperatives are formed by low-income individuals who co-own an apartment or condominium building. Eligible members purchase partial ownership of a building, known as “shares,” at below-market prices. Their shares also entitle them to live in the building under a long-term lease. When shareholders resell their units, they are limited to a certain percentage of the sale proceeds.

Co-buying a property

Buying a property with a relative or friend allows you to pool your resources for a down payment. Doing so may help you qualify for a better loan based on your combined incomes and assets.

Co-buying a property provides many of the advantages of a shared-equity mortgage, but with one big caveat: You may have to share your living space. On top of that, if you later want to remove one buyer from the mortgage, it isn’t always as simple as you might hope.

Learn more about another co-buying option: real-estate wholesaling.

Borrowing a down payment

Consider asking a parent or another close relative to lend you money for a down payment. If they’re open to the idea, it’s smart to draw up a strong agreement for repaying the funds (including any interest) and ensure that both parties feel secure with the arrangement. Just keep in mind that the loan will factor into your DTI ratio when you apply for a mortgage, since it’s additional debt.

However, many lenders will require your down payment funds to be “seasoned” — that is, they need to have been in your possession for at least two months. If so, you’ll need to take that into account and arrange to borrow the money well in advance of your mortgage application.

Frequently asked questions

A shared equity arrangement can be a good idea if you can’t afford to buy a home on your own. However, it’s important to take the time to understand the risks, including potentially high costs and limited financial gains.

Getting a shared equity mortgage will involve paying upfront fees as well as the repayment cost of the investment, which will vary depending on the contract terms.

You must repay a shared home equity agreement by the end of the contract term — typically 10 to 30 years — or whenever you sell your home.

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