Whether you want money to finance a home remodel or need a low-interest loan to pay off high-interest debt, there are several options available to use your home equity for borrowing funds. These include home equity loans, home equity line of credit (HELOC), and home equity sharing agreements.

Home equity sharing agreements are easier to qualify for compared to other equity financing tools. You also won’t have to make any monthly payments on the loan until a later date or when you sell your home. However, it’s important to have a full understanding of how an equity sharing agreement works, what the qualification requirements are, and what the pros and cons are so you can make an informed financial decision.

What Is a Home Equity Sharing Agreement?

A home equity sharing agreement is an arrangement between the homeowner and an investment company. With this arrangement, you can access some of your home’s value without making monthly payments in exchange for a share in your home’s future appreciation value.

You grant the investment company a lien on your property and receive a lump sum in exchange. You must then pay back the amount you borrowed, plus a share of your home’s appreciation when you sell your home or within a specified time, whichever comes first.

The agreement gives the investor a percentage of the home appreciation when you sell your home. If you don’t sell the home, many agreements come with a specific timeframe, such as 30 years, after which you must repay the principal and a percentage of the appreciation. The payment of the dollar value appreciation in your home is the compensation you provide to the lender in return for taking the risk of lending you the original amount.

What Are the Requirements for Home Equity Sharing Agreements?

Home equity sharing agreements are usually easier to qualify for than other traditional loans, such as HELOCs and home equity loans. Here are the general factors that most companies will consider:

  • Equity: You’ll usually need at least 20% equity in your home to qualify.
  • Lien: Most companies will require a first or second lien position on your home in order to approve the lump sum dollar amount loan you’ll receive. If you already have other types of debt tied to your home, you may not qualify.
  • Credit Score: You’ll usually need to meet the lender’s minimum credit score requirement, which is often lower than traditional lenders.
  • State of Residence: Home equity sharing agreement companies only work with borrowers in specific states, so check with which lenders of this type do business in your state before submitting your application(s).
  • Property Type: Most companies work with borrowers that own a 1-4 unit property. Farms on acreages and manufactured homes are usually not eligible.
  • Debt-to-Income Ratio: Some, but not all, lenders will look at your debt-to-income (DTI) ratio to ensure that no more than 45% of your gross income goes towards existing debts, including your housing (mortgage or rent) payment.  

Pros and Cons of Home Equity Sharing Agreements

The main benefit of a home equity sharing agreement is that you won’t have to make monthly payments on the initial loaned funds. However, there are also a few major drawbacks you should be aware of.

Pros

  • No monthly payments to make
  • Some investment companies may accept borrowers with credit scores as low as 500
  • You can end the agreement whenever you want (you must still pay back the balance of your loan, though)
  • You can access the equity in your home without having to sell it or borrow on a traditional mortgage loan (which requires monthly payment of principal and interest) or a home equity line of credit (which requires you to at least pay interest each month).
  • Lenders usually don’t have any employment or income requirements for home equity sharing agreements–the loan is based primarily on the future potential appreciation of your home

Cons

  • If the property value goes up by a lot, you’ll have to give up a substantial amount of equity in dollar terms
  • Not available in all states
  • You may be able to borrow less compared to other borrowing options
  • If you don’t sell your home, you’ll need to make a large lump sum payment when your debt becomes due in 20-30 years’ time.

Types of Home Equity Sharing Agreements

There are two main types of home equity sharing agreements, based on how the investment company gets paid at the end of the term:

  • Share of Appreciation: With this type of agreement, you’ll pay the company the initial amount you borrowed, along with a percentage of your home’s appreciation.
  • Share of Home Value: With this type of agreement, you’ll just pay a percentage of your home’s value at the time you sell it instead of repaying the amount you borrowed. This means that if your home’s value actually decreases over your loan term, you may pay back less than what you originally borrowed.

What Do Home Equity Sharing Agreements Cost?

The costs of a home equity sharing agreement vary by location and many other factors. However, these are the fees you’ll typically pay, just like the closing costs you’re expected to pay with standard fixed or adjustable mortgages:

  • Escrow fees
  • Title services
  • Home inspection costs
  • Home appraisal fees
  • Loan origination fees (3% to 5%)

Keep in mind that you’ll have to pay escrow, home inspection, and appraisal fees again when you exit the agreement. We recommend using a home equity sharing agreement calculator to estimate your costs and what your payment may look like at the end of the agreement.

To use the calculator, you’ll need to provide information like your home’s value, current secured debts, the amount you want to borrow, your home’s estimated annual market price growth for the past few years, and the length of the loan term you’ll likely select.

Who Is a Home Equity Sharing Agreement Best For?

Home equity sharing agreements may be a good option for your financial situation if:

  • You’re not able to qualify for other financing options due to bad credit.
  • Your cash flow situation makes it difficult to afford monthly payments.
  • You want to keep more of your monthly income to save for other expenses.

It may not be a good option for you if:

  • You want defined borrowing costs that are predetermined as part of the loan’s contract at the time you take out your loan.
  • You want to borrow more of your equity than these loans will typically allow.
  • You don’t want to share a portion of your home’s sale price, especially if it appreciates significantly.

Where To Find Home Equity Sharing Agreements?

Credit unions, banks, and mortgage lenders don’t offer home equity sharing agreements. Instead, you’ll typically be able to access these types of loans through companies that usually get funding from venture capital funds, such as Point, Unlock, Unison, and Hometap.

We recommend taking a look at some of the commonly used home equity sharing agreement templates to get a better idea about repayment terms, upfront fees, and other details about how the transaction will work.

How To Choose the Best Home Equity Sharing Agreement Lender?

It’s important to compare different home equity sharing agreement companies in terms of costs and repayment terms before you choose one. Here are a few things to keep in mind:

  • Check to see the company’s requirements for approval, to ensure you’ll qualify.
  • Ensure you’ll be able to borrow the amount you require.
  • Ensure the company operates in the state where you reside.
  • Compare the fees, term lengths, and funding time for different home equity sharing companies.
  • Check the company's online reviews on the Better Business Bureau (BBB) and Trustpilot’s websites.

Is a Home Equity Sharing Agreement a Good Idea?

Home equity sharing agreements can be a good option if you’re unable to qualify for traditional home equity financing options due to significant credit and/or income challenges. It may also be a viable option if you have limited income and can’t afford to make monthly payments.

We recommend taking some time to understand how this financing option works and the repayment terms of the home equity investment company you plan to work with before you borrow. Keep in mind that refinancing your home through a traditional mortgage will no longer be an option once you enter into this type of agreement.

So, if you decide that a home equity sharing agreement is not for you, you can see that there are other alternatives. Depending on the amount of money you need to borrow, there may be other lending options to consider in lieu of home equity sharing agreements, such as personal loans, cash-out refinance, home equity loans, reverse mortgages, and HELOCs. You can also take some time to improve your credit and qualify for a better interest rate if you don’t need money right away.