What is Shared Equity Homeownership?
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Summary:
Shared equity homeownership programs describe a number of initiatives that provide affordable homeownership opportunities for lower-income households. In most cases, nonprofit organizations or local governments provide subsidy dollars to reduce the sale price of a home, making it attainable for those with modest incomes. The most widely implemented shared equity programs are community land trusts, deed-restricted housing programs, and limited equity cooperatives.
Finding safe, decent, and affordable housing is an ongoing problem in the United States. This is particularly true for lower-income households. Homeownership is also one of the major paths to wealth building in this country, but social and economic barriers make it very difficult for some individuals and families to achieve the goal of affording their own homes.
Shared equity models are an attempt to bridge those barriers to homeownership by making affordable housing units available for purchase to low and moderate-income households. Read on to learn more about shared equity homeownership and its role in providing housing units with permanent or long-term affordability.
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What is shared equity homeownership?
Shared equity homeownership includes a variety of housing programs that are an alternative to renting and traditional homeownership in expensive housing markets. The shared equity programs are meant for individuals and families with low and moderate income who couldn’t otherwise afford to own their own place.
There are many different shared equity models of homeownership opportunities. That said, they all share similar characteristics in that they focus on long-term, owner-occupied housing that helps families build wealth within inclusive communities. As you can see from the chart below, it’s easy to understand why these efforts are necessary.
How does shared equity homeownership work?
Usually, nonprofits or local governments provide a subsidy to help reduce the cost of homeownership opportunities. Sometimes the subsidy dollars come in the form of direct financial assistance. However, other times they’re made as incentives to developers to build or rehabilitate permanently affordable homes and ensure the homes remain affordable in a long-term or permanent capacity.
In return for the subsidy, which results in low-income families being able to buy housing units at below-market-rate housing prices, many inclusionary housing programs put resale restrictions on the homes. This means the next family (and the next family, etc.) also gets to benefit from the community’s investment in affordable housing.
The two main ways of offering shared equity homeownership include shared appreciation loans and subsidy retention programs.
- Shared appreciation refers to loans that are paid back at the time of resale including a percentage of the home’s appreciation. That money is then reinvested to assist subsequent lower-income households with affordable homeownership opportunities.
- Subsidy retention types of shared equity programs are the more common model and instill resale restrictions. These restrictions ensure the subsidy stays the home.
Concerns for modern programs
Because shared equity homeownership programs require a community’s investment, these opportunities have only seen modest growth. For proponents of this program — like Emily Thaden of Shelterforce, a nonprofit publication published by the National Housing Institute — this slow progress leaves a lot to be desired.
According to Thaden, shared equity homeownership needs more policies, funding, and financing before many lower-income families and communities can fully realize the benefits of these programs.
Difference between shared equity homeownership and shared equity agreements
While the two terms sound very similar and share some characteristics, there are a few key differences. As explained, shared equity homeownership, also known as home equity investments, makes home-buying more affordable for lower-income families through non-profit or government assistance programs.
Shared equity agreements, also known as home equity investments or shared appreciation, on the other hand, are private agreements between a prospective or existing homeowner and an investor.
In a shared equity agreement, there are two basic scenarios. One situation occurs when an individual can’t come up with a big enough down payment on their own to purchase a home. For this reason, they take on an investor (often a family member in this case) to put up the rest of the money. In exchange, the investor gets a stake in the home and will share in the profits when the property is sold. This scenario is similar to shared equity homeownership, only it’s a private arrangement.
A different example of a home equity investment, or shared equity agreement, is when a homeowner wants to cash out some equity in their existing home and agrees to sell a portion of the home’s future equity to an investor in exchange for cash upfront. The money is paid back, plus a percentage of the equity, when the home is sold or the contract is up.
To get a better idea of how home equity investments can help you tap your equity, take a look at some of the home equity investors below.
Shared equity homeownership models
The three most widely used types of subsidy retention shared equity models of affordable housing include community land trusts, deed-restricted housing programs, and limited equity housing cooperatives.
Community land trusts
Community land trusts (CLTs) are one the most prevalent forms of shared equity housing, with approximately 250 community land trusts in nearly all 50 states and the District of Columbia. This model balances wealth building for families of modest incomes with maintaining the community’s investment in affordable homeownership opportunities and is meant to be a self-sustaining model.
A community land trust is an area of land owned by a public or private nonprofit group for the purpose of providing affordable housing. The organizations do this by removing the cost of land from the purchase price. Buyers purchase the structure but lease the land, which is owned by the community land trust. This significantly reduces the size of the mortgage and the monthly mortgage payments. Homeowners then pay a small fee to the community land trust for the lease of the land.
Resale restrictions are built into the land lease to maintain affordability for subsequent lower-income families. Community land trusts ultimately provide stable homeownership opportunities that will continue to remain affordable for future homebuyers of limited means.
To get a better idea of what mortgage rates you qualify for, use our comparison tool below to search multiple mortgage lenders at once.
Deed-restricted housing programs
Deed-restricted housing is another approach to shared equity homeownership. This is where a subsidy is applied to the purchase price of deed-restricted units (both new and existing homes) to bring them down to a more affordable price for homebuyers of certain income levels, such as 80% below the area median income (AMI).
The deeds then have restrictions installed regarding the sale and subsequent resale of the deed-restricted units for future homeowners of equally modest incomes. The goal of this deed-restricted housing stock is to preserve long-term affordability by selling the units at very affordable prices, which are often sold well below fair market value.
Related reading: Keep in mind that deed-restricted housing is different from a deed-restricted community. To learn more about the differences, check out our article on deed-restricted communities.
Limited equity housing cooperatives
A limited equity cooperative is a bit of a different housing strategy. In this shared equity model, buyers don’t purchase a housing unit. Instead, they buy a share of stock in the cooperative. This entitles them to the use of a housing unit at a lower price. When a share is resold, there are limits on the resale price so the unit still remains affordable.
Oftentimes this kind of shared equity homeownership program refers to an apartment complex, townhouse, or other multifamily development, but not necessarily. In fact, many manufactured home communities have made the switch to this type of shared equity homeownership, where the homeowners have formed a corporation or nonprofit cooperative to purchase the land together.
One of the key features of these limited equity cooperatives is the idea of combined ownership and decision-making by shareholders. There are roughly half a million limited equity cooperatives in the U.S., according to a report published by the National Housing Institute.
Benefits of shared equity homeownership programs
In addition to the obvious benefit of affordable homeownership opportunities for low and moderate-income families, shared equity homeownership programs provide many advantages to new home buyers.
Shared equity programs encourage wealth-building
As mentioned, homeownership is one of the best ways for families to build wealth through building equity in their homes. A study by the Urban Institute found that even with resale restrictions, homeowners are still usually able to make a profit. And even with home price appreciation, the homes remain affordable for the next lower-income family who purchases the property.
Plus, the lower costs associated with shared equity homeownership can free up money for families to put towards other goals, such as saving for retirement or educational costs.
Support both before and after purchase
Educating homebuyers is an important tool in helping buyers become thriving homeowners. And shared equity strategies for successful inclusionary housing programs seem to be well-established at providing homeowners with assistance both pre- and post-purchase.
To this end, many shared equity programs include classes, newsletters, no-interest emergency loans, tool-lending libraries, and many other resources to ensure that homebuyers are successful in their shared equity communities.
Builds stronger communities
Shared equity programs are inclusionary housing models, and residents tend to share similar goals. These include living in a safe and stable environment with owner-occupied housing and having access to better educational and job opportunities.
Reduces the risks of homeownership
First, by significantly reducing home prices — and thereby lowering monthly mortgage payments as well — shared equity homeowners have a better chance to both afford owning a house and also maintaining homeownership.
In addition, shared equity homeownership programs somewhat insulate buyers from falling home prices because they’re already buying houses at well below fair market value.
Drawbacks of shared equity homeownership
While there aren’t exactly disadvantages to shared equity homeownership programs, there are some considerations that prospective homebuyers should be aware of.
- Mortgage responsibility. Buyers in shared equity homeownership communities do benefit from reduced housing prices and lower monthly payments. However, they are still responsible for making timely mortgage payments in order to avoid foreclosure.
- Must maintain the property. Unlike rental properties, shared equity homeownership means buyers need to take responsibility for maintaining the property they’ve purchased, including paying for any repairs that might be needed. For example, if your budget is already stretched, it can be tough to come up with the cash for a new water heater or other unexpected expenses.
Maintaining the property also means that the owner is responsible for all utilities and duties related to lawn care, snow removal, and other ongoing maintenance chores.
Key Takeaways
- Shared equity homeownership programs provide affordable housing for low and moderate income families. This is possible through a community’s investment in various shared equity models.
- The three most common types of shared equity homeownership programs are community land trusts, deed-restricted housing, and limited equity cooperatives.
- Buyers eligible for shared equity homeownership programs include low and moderate-income families whose credit history, income, and inability to come up with a down payment preclude them from traditional homeownership.
- The shared equity homeownership model balances wealth building for families with inclusionary housing programs that protect the community’s investment in affordable housing.
- Despite the benefits, one of the problems with shared equity programs is the lack of significant growth in equity homeownership opportunities.
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