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What is a shared equity financing agreement?

On Behalf of | Nov 20, 2020 | Firm News

With a shared equity financing agreement, two individuals purchase a property together. While uncommon, this situation may occur when one person cannot afford the home independently. 

Review the details about shared equity financing agreements to make a decision about seeking this type of real estate funding. 

Structure of the agreement

With this type of agreement, one person has a financially stronger position. He or she might have better credit or higher income. That person acts as the investing owner. The other person will live in the home and serve as the occupying owner. Usually, the shared equity financing agreement states that the occupying owner will pay a certain percentage of the mortgage, property taxes, homeowner’s insurance and other expenses. Often, the investing owner provides part or all of the down payment in exchange for profits when the occupying owner moves out and sells the home. 

Uses of a shared equity financing agreement

This type of mortgage is most often used when parents help an adult child buy their own home. An owner-occupant landlord might also use this structure to expand access to more expensive properties. Most states require the investing owner to charge the occupying owner rent at a fair market value depending on the portion of the home he or she occupies. 

Investing owners can profit from this type of mortgage because they own a portion of the equity. For example, this type of investor purchases 50% equity in a property and resides on the top floor while a tenant who also contributes to the mortgage owns the bottom floor. He or she receives half the proceeds from the eventual sale of the home.