Shared Equity Loans (my opinion or concern)

I was asked for my opinion on shared equity financing not long ago. At the time, I hadn’t looked into this option, so I had no view; I had skeptical questions. I wanted to know:

• Why would one choose this type of financing?
• If one of the partners failed to meet their obligations, would the other be responsible for that debt
• If one failed, was the other in jeopardy of losing the property

Image by N-region from Pixabay

I have taken the time to research this type of Home Equity Partnership and will share with you an opinion. Fannie Mae in an article titled Share Equity Programs under the heading of 

“Fannie Mae is making shared equity lending easier to access and reinforce protections for consumers:

Shared equity can be complicated, so we’ve updated requirements to ensure borrowers understand the transaction. We’ve also developed a new rider for properties with income and resale price restrictions, the SHARED Equity Amendment (Form 2200), and updated policies on Private Transfer Fees for shared equity transactions.” In an article titled Shared Equity Mortgage: Meaning, Pros and Cons, FAQs by Julia Kagan updated on May 4, 2022, and reviewed by Doretha Clemon under the heading of “What is a shred Equity Mortgage?”

A shared equity mortgage is an arrangement where a lender and borrower share property ownership. The borrower must occupy the property. When the property sells, the equity allocation goes to each part, according to their equity contributions. Each party also shares any losses accrued from the sold property.

The article goes on to explain the three types of these offerings.

• Community Land Trust
• Income and Resale Price Restrictions
• Limited Equity Cooperative

This statement about “Shared equity can be complicated” was a warning. 

By Kmhkmh – Own work, CC BY 4.0, https://commons.wikimedia.org/w/index.php?curid=67617304

These are a few of the lenders and one sight that compares these partnerships:
https://haus.com/partner
https://noah.co/
https://point.com/
https://www.fund.com/top/home-equity/desk/

The pros and cons of these types of loans:

Pros:

• Allows people with little savings to obtain a house
• Might cover the down payment and closing cost
• They say they can increase access to housing or home ownership in places where it is needed
• They claim these loans can lower local default and foreclosure rates
• They say they can help buyers build equity to use toward future home purchases

By XFFRC at https://dibujando.net/dib/the-three-little-pigs-and-the-wolffolk-tales-series-277192

Cons

• Homeowners get less of the profits when the home sells
• Limits as to what price the house can sell for, when it can be listed, and who may purchase it
• These programs are supposed to be rare and hard to acquire

I am skeptical of these loans. Once you’ve received one, the third-party lender has placed limitations on when you can refinance and other options available if you obtain a regular 30-year fixed-rate mortgage. I understand people trying to give their families a better life than what they had.

I am not convinced that those preying on them in their hour of need are helping them. They impose rule which protects their investment. They are party to those loans. If or when the homeowner loses the ability to maintain the cost of homeownership, they most likely have a method to take the outstanding payments and keep the house, and the person they claimed to have been helping has lost their home dreams and probably damaged their financial status. It smells a lot like the ARM loans of old. I understand that these loans have their purpose. However, like the Adjustable-Rate Mortgage loans, that purpose isn’t to help people as much as it was to help themselves. If, by chance, the new homeowner can make their three hundred and sixty payments, the third party is extremely well compensated. Talk about a secured loan:

• If the homeowner can meet the terms of the contract, the lender wins
• If the homeowner isn’t able to meet the terms of the agreement, the lender wins more

By PHOTO BY: Staff Sgt. Dan DeCook at  ttps://www.afdw.af.mil/News/Photos/igphoto/2000577879/

If third-party lenders were to have parked their money in the bank, the time value of money rules tell us they would lose their money’s purchasing power.

If they were to invest in stock and bonds, they most likely would receive the increase in income that the home in the long run would produce. Like always, it is buyer beware. There may be terms that favor the buyer. There may be circumstances where purchasing a home this way is logical. I don’t see it. I still prefer the 30-year fixed-rate mortgage. Over the long haul of home ownership, they produce winning results. Still, the bottom line is that I need to find out your situation or review the terms offered. My advice is to proceed with extreme caution. Some circumstances warrant me obtaining one of these loans. Some terms allow this type of loan, making these loans the logical choice. I can only say what I’d do once the loan docs are before me. However, these are loans, and one should take the trouble to secure at least three loan offers and negotiate more favorable terms. Who knows, threatening the backs with the acceptance of obtaining one of these loans may make them more willing to accept your offer for acquiring a 30-year fixed rate note.Note: Images on this blog site are from a free source. No image or group of photos are intended to represent the people I serve. I don’t care about race (that is a politically correct term that I do not like because we are all of the same race, the human race. I prefer the term ethnicity), color, religion, sex, gender, marital status, disability, genetic information, national origin, source of income, Veteran or military status, ancestry, citizenship, primary language or immigration status. I am a service provider for all people. If we band together and help one another, we will all rise together.