If you’ve been turned down for a personal, auto, home equity, or other type of loan and own a home, you may still be able to obtain funding by taking advantage of a home equity agreement (HEA). Also known as a home equity investment (HEI), an HEA can be helpful to homeowners seeking alternative financing.
The types of properties typically eligible for a home equity agreement include houses, condominiums, townhouses, multi-family homes, and even manufactured homes with a decent amount of equity.
In this article, I explain what a home equity sharing agreement is and address some of the pros and cons of using this type of partnership to get cash. However, you can skip directly to the top HEA companies if you’re ready to apply.
What is a Home Equity Agreement
An HEA is a contract between you, the homeowner, and an investor. You sell an ownership stake in the future value of your home in exchange for cash. The amount of money you receive from investors will depend on the value of your home and the available equity.
A home equity agreement has a fixed amount of time to pay back the amount you received, as a lump sum, typically when you sell the property. Investors are betting your home will appreciate over this period based on past trends in the housing market.
Difference Between an HEA and a Loan
A home equity agreement is often called an HEA loan, but it’s technically not a loan. It differs from a loan in a few major ways. The primary differences are that no interest accrues under a home equity sharing agreement, and most HEAs settle with a balloon payment rather than monthly payments over time.
Also, most personal loans, home equity loans, and lines of credit require a decent credit score, but someone with a bad credit score as low as 500 can get approved for a home equity agreement without jumping through hoops.
Moreover, an HEA doesn’t appear on your credit report, except maybe as a hard inquiry used during the application process for verification purposes or if you default on the agreement.
By using a home equity agreement to pay off debt, you may be able to improve your credit score significantly by reducing the balances of credit lines and loans that are reported to the credit bureaus.
HEA versus HELOC
A home equity line of credit, or HELOC, is similar to a home equity sharing agreement in that you’re using the equity in your home to gain access to money. However, with a HELOC, you are borrowing the money. With an HEA, you share the equity in your home as an investment.
A HELOC is a revolving line of credit that works like a credit card. You can withdraw money from your account whenever you want, up to your credit limit, and you can reuse the funds you pay back.
Interest on the borrowed funds if they are not repaid within a certain period, typically around a month, whereas there is no interest accrual under an HEA, and you receive all of the funds upfront.
With a HELOC, a bank, credit union, or other lender will offer a credit line based on the available equity in your home and use your debt, income, and credit score as guiding factors in determining your overall eligibility.
HELOCs typically have variable interest rates and may require upfront closing costs and an annual fee, depending on the lender you choose.
HEA vs. Home Equity Loan
A home equity loan is another popular option for homeowners with equity in their home. Home equity loans typically carry a slightly higher interest rate than a home equity line of credit and are fixed, whereas there are no interest charges with an HEA.
With a home equity loan, you borrow a lump sum against the equity in your home, repaid in monthly installments over 5 to 30 years. Most lenders allow you to borrow up to 75%-85% of the available equity and often require upfront or financed closing costs.
A home equity loan typically requires a fair credit score of 620 or higher and a debt-to-income ratio (DTI) of 43% or below. A home equity agreement usually has a much lower minimum credit score requirement, and companies may not even check your DTI.
HEA Pros and Cons
Pros
- Use the equity in your home.
- Access large funds.
- No monthly payments.
- No interest payments.
- Little to no restrictions on spending.
- Low credit score requirement.
- Low- or no-income requirements.
Cons
- Need sufficient home equity.
- 3-5% origination fee.
- Transaction expenses (appraisal, title, credit, insurance, recording, and escrow fees).
- The total you’ll have to repay is unknown.
- The one-time balloon payment could be burdensome.
- Future equity could be worth significantly more than you expected.
General HEA Requirements
There are eligibility requirements you must meet to qualify for a home equity agreement, which can vary slightly by provider:
- The property type must be residential real estate, including single-family condos, townhouses, houses, manufactured homes, and multi-family properties with up to four units.
- The property must be your primary residence, second home, or rental property. Co-op-owned properties don’t qualify.
- The property should be in good condition.
- Hazard, flood, or other insurance may be required.
- The property must be in good standing, with no pending lawsuits or other adverse actions.
- There must be at least 25-40% equity in the property, which is the difference between the property’s market value and any loans secured by the property.
- The property address must reside within the limited number of states in which investors operate.
- A 500 credit score minimum with no outstanding judgments or current bankruptcies.
How to Calculate Your Home Equity
- Estimate the fair market value of your home.
- Find your current mortgage balance, along with any other debts on the property.
- Subtract the number of debts from the fair market value.
The remainder is your total home equity.
So, if your home is estimated to be worth $600,000 and you have total debt of $350,000, your home equity is $250,000.
Divide the home equity ($250,000) by the home’s value ($600,000) and then multiply by 100. Your home equity percentage is 41.66%.
Top 3 HEA Companies
1. Unlock
- Access between $15,000 and $500,000.
- High DTI accepted.
- No income requirements.
- 500 credit score minimum.
- Flexible, 10-year term.
- Minimum $175,000 home value.
- Home equity of at least 30%.
- Funding in 30-60 days.
Availability: Arizona, California, Florida, Hawaii, Idaho, Indiana, Kentucky, Michigan, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, North Carolina, Ohio, Oregon, Pennsylvania, South Carolina, Tennessee, Utah, Virginia, Wisconsin, and Wyoming.
2. Point
- Access $30,000 to $600,000.
- Available for long-term agreements (up to 30 years).
- No income requirements.
- DTI not considered.
- Flexible credit requirement (500+ score).
- Receive up to 20% of your home’s value.
- Close in as little as 3 weeks.
Availability: Arizona, California, Colorado, Connecticut, Florida, Georgia, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, Missouri, Nevada, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, South Carolina, Tennessee, Utah, Virginia, Washington, Washington DC, Wisconsin.
3. Hometap
- Access from $15,000 to $600,000.
- Receive funds in as little as 3 weeks.
- Financial flexibility for up to 10-year terms.
- Invests in manufactured homes.
- Minimum 585 FICO® Score.
- Have at least 25% equity in your home.
- No DTI restrictions.
Availability: Arizona, California, Florida, Indiana, Michigan, Minnesota, Missouri, Nevada, New York, New Jersey, Ohio, Oregon, Pennsylvania, South Carolina, Utah, Virginia.
HEA Uses
Deciding how to use your home equity agreement funds is entirely up to you. You can use it for home improvements or to pay off high-interest loans and credit card debt.
Some people will use it to purchase a car, finance an RV, buy a boat, get a motorcycle, pay for their children’s college, or fund a vacation. Medical expenses, paying for a wedding, taxes, or starting a business are common HEA uses, too. In some rare cases, you’ll have to use it to pay off debts first.
Final Thoughts on Using an HEA Instead of a Loan
An HEA can be a great choice for homeowners who don’t have the credit or income needed for a large personal loan, home equity loan, HELOC, cash-out refinance, credit card, or otherwise. The credit score and income requirements are much lower than those for traditional loans because a home equity agreement is not a loan, and there are no monthly payments.
However, there are origination fees and other transactional expenses to consider when entering into a home equity agreement. The balloon payment needed at the end of a term, or when the property sells, should be given decent consideration before signing up, especially for those who might want to stay in the home longer.