Source: Tara Siegel Bernard of the New York Times
Throughout the US there are countless people who would love to buy a home, but continue to pay that rent check to their landlord every month instead. Why is this?
For the average aspiring homeowner, the largest obstacle to overcome is the down payment. Several companies, including San Francisco-based Unison, have found an opportunity in this challenge: shared equity.
Shared equity allows homeowners to split their down payment with an investor in exchange for a piece of the appreciation when the home sells.
How shared equity benefits homeowners:
- Increase buying power
- Retain some of your savings and buy a home
- Avoid costly private mortgage insurance and high interest rates
The average loan to value (the percentage borrowed to purchase a home) for a first-time homeowner is 92.6%. Homebuyers who borrow more than 80% of a home’s value upfront are seen as risky by lenders. Traditionally, they overcome this with unfavorable interest rates and mortgage insurance. Shared equity allows for buyers to afford a large enough downpayment to avoid these costs.
The downside? By sharing equity with a firm like Unison, a home buyer saves upfront but ends up giving up a cut of their proceeds from sale if their home has increased in value.
Regardless of whether you are the type to give up some of your equity to allow an outside investor to alleviate some of the capital-intensiveness of home buying, shared equity is catching on. Unison invested alongside 450 homebuyers last year, and they project to invest with roughly 2,500-3,000 more people in 2018.
Check out the full article to dig deeper into the mechanics of shared equity.
Buying a home can be one of the most exciting (and costly) purchases you will make during your lifetime. One of the most important steps in the process is determining how much you can afford. Yet, many people wait to secure financing until it is absolutely necessary. In a competitive housing market, having your financing in place before you start your home search gives you the ability to place an offer immediately after viewing the home of your dreams and making that offer stronger. It also allows you to focus on the more enjoyable decisions like choosing a neighborhood.
PRE-QUALIFICATION VS. PRE-APPROVAL
Pre-qualification and pre-approval are two common words thrown around in the mortgage industry. Pre-qualification is an unofficial estimate of how much you can borrow and repay for your home purchase. The amount lending institutions will pre-qualify you for is derived from the information you provide on your finances, credit history and income. Obtaining Pre-approval requires you to submit financial documents, such as tax returns, business licensing, and bank statements. Lenders will analyze the documents, run credit checks, and verify employment. The pre-approval process verifies you have the ability to repay the amount for which you are approved and carries more weight when you submit an offer to purchase a home. Although it takes more steps to obtain pre-approval, it verifies to the seller that you have the financing available to follow through with the purchase. (more…)