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Shared equity mortgage to the rescue.

By
Services for Real Estate Pros

Despite the recent softness in the real estate market, buying a home can be a stretch for many first-time buyers and young move-uppers. Prices are relatively high in most areas and lenders are getting fussy. Shared equity mortgage could be worth a look. Let's go over some of the basics.

Normally it involves well-off parents helping out their children. But it can be anyone besides the parents. Anyway, let's say a father contributes $60,000 toward a down payment on a $300,000 house his married daughter wants purchase. His investment is 20% of the home's value. He would get that back at a future sale, plus 20% of any appreciation to that date. Just a short example. 

Benefits to the daughter are that her family is able to buy the house they need in the neighborhood they desire to live in and the home loan is easier to qualify for because of the 20% down payment that they otherwise wouldn't have. And the father is now a real estate investor and proud to be able to help a young family out.

Everything in an arrangement like this should be put in writing. Normally the homeowners would be responsible for the mortgage payments and during tax time get the interest deduction. Property taxes and insurance are open for negotiation, although often they are split. Many experts recommend that an end date is set, ranging typically from 3 to 10 years, when the investor, the father in this example, will be paid back either by means of a refinance or a sale.  

Should the father's name be on the loan? It could be, but deals between family are frequently very flexible. If I were the father, I'd have an attorney write up the contract. And keep my emotions in check since we're talking about a financial judgment here. For many young families, shared equity mortgage could be the path to take.

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Provided by: 

Esko Kiuru
Mortgage, real estate and apartment industry analyst 

www.BluefoxToday.com - syndicated mortgage, housing and property management blog

eskokiuru@gmail.com
My cell: 702-499-1006

Maggie Dokic /Indialantic | 321-252-8696
Magdalena Dokic - Indialantic, FL
Selling the beach in Florida's space coast
Esko, thanks for writing about this.  It makes perfect sense but I didn't know it existed.  Is it something that can be proposed to most lenders or harder to find?
Apr 23, 2007 08:22 AM
Chris Lengquist
Ad Astra Realty - Olathe, KS
Kansas City Real Estate Investing
I have used this on a few occasions dating back to the mid-90's in Suburban Maryland.  It can work. It can get messy.  A thorough contract needs to be drawn up with all sides in complete understanding of what their roles are, when the Equity Share will terminate, etc.  With all of that, it can be a great tool. 
Apr 24, 2007 09:04 AM
Esko Kiuru
Bethesda, MD

Maggie,

The best way to handle it is to get an attorney involved, so in case there are disagreements, it's all in writing. You know how it can be within a family.

Chris,

You're right about getting it in writing. That'll prevent a lot of potential headaches, ulcers, falling hair, family feuds and what not.

Apr 25, 2007 04:50 AM
Dan Hartman
Province Mortgage Associates - NMLS #2861 - Providence, RI
This sounds like a great way to more out of your money available for investment, and to help someone in need of a home.  Like you said, good contracts make for good relationships. Thanks for sharing! 
Sep 08, 2007 01:53 PM
Esko Kiuru
Bethesda, MD

Dan,

This arrangement could be very useful for first-time buyers.

Sep 10, 2007 08:29 AM
Cheryl Hale
SMP Mortgage, Inc - Plymouth, MI
Mortgage Loan Originator NMLS#276668

Esko,

How is the outside contribution listed on the 1003?  I would assume gift funds, but what if the contributor is not a family member?

Nov 09, 2007 07:27 PM
Esko Kiuru
Bethesda, MD

Cheryl,

It'd be another applicant.

Nov 10, 2007 03:42 AM
Anonymous
Garrett

Hello,

I'm not sure if you're still around as this post from 2007. Do you know about the tax implications of the Shared Equity arrangement? Would the father in your example be subject to the gift tax if he does not want to be on the mortgage? Said another way, the father would help with the down payment but the son would be responsible for the mortgage itself. Please let me know. Thanks.

 

Garrett

Mar 27, 2009 01:25 AM
#8
Esko Kiuru
Bethesda, MD

Garrett,

Thanks for stopping by. I have to refer you to a tax professional who would be a better source to answer your questions.

Mar 30, 2009 12:31 AM
Anonymous
Patricia Schneider

This is great information.  I am a new home buyers and non-relatives want to help us get into a house and this is one option we are looking at.  Does this work, even if we don't have perfect credit and on our own qualify only for $140,000 loan, but our interested party wants and can put !00,000 in cash up front? so we can get into the house we want in the desire neighborhood?

Thanks

Jun 15, 2009 05:47 PM
#10
Esko Kiuru
Bethesda, MD

Patricia,

It should work, however, it's difficult to say for sure without going over your credit situation, income levels etc. If you are interested in knowing more, feel free to get in touch by phone at 702-499-1006.

Jun 16, 2009 04:01 PM