A new trend is seeing finance companies help buyers with a down payment on a home in exchange for future equity in their properties.
Companies such as OWN Home Finance and Unison are prepared to offer buyers up to fifty percent of the cost of a down payment, or 10 percent of the home's value, but when buyers decided to sell the company takes around 35 percent of the profit. Unison partners with Freddie Mac to automate the mortgage underwriting process with an equity stake. Meanwhile OWN is set to launch with a similar business model soon, and will target buyers with median incomes of around $55,000 to $60,000 per year who're looking to purchase a home in the $400,000 to $500,000 range.
“There’s a major hurdle that locks out a lot of qualified people [who] can’t come up with hundreds of thousands of dollars, even if they have good credit,” OWN cofounder Brian Bailey told MarketWatch. “We view our product as a rung in the ladder, helping people enter homeownership and build wealth.”
Some housing experts believe it's a good experiment in down payment assistance for buyers who're struggling to save. “It’s really intriguing, as home prices appreciate and incomes don’t," said Brett Theodos, a senior research associate at the Urban Institute. "It feels like a missing rung in the ladder between renting and owning. We have so many investment vehicles that you can get into for small amounts of money, but homeownership is very much an all-or-nothing proposition.”
However, Theodos said buyers should check the small print on these types of programs, because their may be a catch. Companies only make money when the property is sold, and so there might be a clause that contains "special provisions" if they sell in under three years, for example.
Daren Blomquist, senior vice president of ATTOM Data Solutions, said companies were facing a challenge for deeper market penetration of equity-sharing mortgages. “I see this as a response to a problem,” he told MarketWatch. “It’s not going to be appealing if home prices start dropping. It’s hard to see it as something that could exist in all market cycles.”
Michael Micheletti, a spokesperson for Unison, said the program "definitely addresses affordability challenges," but insisted the appeal is larger than that as it could be a way for some to avoid using all of their savings. "This is for somebody who doesn’t want to own all their home. People don’t want to put all their money into an asset that they may or may not get all the return on because they saw what happened a decade ago.”