You want to buy a home and have the income to support a decent monthly payment – but you can't save up enough money for a significant down payment. With home prices and interest rates rising, you're afraid that you'll be priced out of the market before you can save up a full down payment.
If you qualify for FHA or VA loans, you may be able to secure a loan with far less than the standard 20% down payment required to avoid private mortgage insurance (PMI). However, you'll have to borrow more money by definition and will end up paying considerably more in interest over the life of the loan.
A few companies are offering a new alternative for down payment assistance – a shared equity mortgage. With a shared equity mortgage, a third-party investor contributes a portion of your down payment in exchange for a share of the proceeds (or losses) when your home is sold.
This contribution is not a loan, and there are no monthly payments or accruing interest. Borrowers will only pay the third party when they sell the home or if they choose to buy out the investor's share.
The investor is assuming that your home will appreciate enough over time to provide a suitable return. You are assuming that you will save enough on PMI and collective interest payments to cover the payout costs upon sale.
For example, the Unison HomeBuyer program will contribute up to 50% of your down payment for a proportional share of the appreciation. At a 50% contribution to down payment, Unison's payout share is 35%. At a 25% contribution to down payment, Unison's share is 17.5%.
Assume you contribute $50,000 and Unison contributes $50,000 to your $500,000 home purchase. Now consider selling that home after five years. If your home has appreciated to $600,000, you'll pay Unison $85,000 – the $50,000 original investment plus 35% of the $100,000 appreciation.
If your home hasn't appreciated at all, you'll pay Unison the original $50,000 investment at the time of sale. That's essentially an interest-free loan for five years.
What if your home lost $100,000 in value over that time? You'll pay Unison $15,000 – the original $50,000 investment minus 35% of the $100,000 loss.
In Unison's case, you can buy out the contract at the three-year mark or beyond based on an independent appraisal value – but Unison won't absorb any share of losses for a buyout. You'll have to pay off the full contribution. Similarly, you can sell the home before the three-year mark, but Unison will only share in losses after three years of ownership.
Review the full terms of any shared equity mortgage agreement to make sure that you understand the terms, obligations, and limitations. Since this contribution is an investment, the investor may write in contractual obligations to maintain the value of the investment – for example, setting minimum expectations for home maintenance. Your credit score will also give an indication of the risk of you defaulting on your payments or not being able to maintain your home well. You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.
Shared equity contracts do not have to be through investment companies like Unison. For example, parents have been helping their children buy homes in this manner for years. However, it's wise to have a formal contract to clarify ownership and terms.
You have multiple options for down payment assistance, including the old-school method of putting off home buying while you build up funds. Nevertheless, at least consider a shared equity mortgage – especially if you live in an area with high home prices or you simply can't save up sufficient funds. It may be your most realistic option for a home purchase.
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