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 or HEI, a home equity agreement can be helpful to homeowners seeking alternative financing.
The types of properties that are typically eligible for a home equity agreement are houses, condominiums, townhouses, multi-family homes, and even manufactured homes with a decent amount of equity in them.
In this article, I’ll share what a home equity sharing agreement is, and address some of the drawbacks and benefits 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 (HEA)
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 offered to you 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, or when you sell the property. Investors are betting your home will appreciate over this time 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 there is no interest accrued with a home equity sharing agreement, and most HEAs are settled 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, other than maybe a hard pull of your credit for verification purposes, or if you default on the agreement.
When 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 on your credit report.
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. And 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 where you draw money out of your account whenever you want, up to your credit limit, and you can reuse the funds you pay back. You are charged interest on the borrowed funds if they are not repaid within a certain amount of time, around a month, while there is no interest accrual with 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 tend to have a variable interest rate and may require upfront closing costs and an annual fee, depending on which 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 tend to come with a slightly higher interest rate than a home equity line of credit and are typically 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 to be repaid in monthly installments over a period of 5 to 30 years. Most lenders allow you to borrow up to 75%-85% of the available equity and often require upfront 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.
- The total needed to be repaid is unknown.
- The one-time balloon payment could be burdensome.
- Future equity could be worth significantly more.
General HEA Requirements
There are eligibility requirements you must meet to qualify for a home equity agreement, which can vary slightly by provider:
- Type of property – residential real estate, including condos, townhouses, single-family 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.
- Hazard, flood, or other insurance may be required.
- The property has to be in good standing with no pending lawsuits or other adverse actions.
- The property should be in good condition.
- There must be at least 25-40% equity in the property – the difference between the market value and any loans against the property.
- The property address must reside within the limited number of states 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 have a fair market value of $600,000 with a 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 $30,000 and $500,000.
- Limited DTI requirements.
- 500 credit score minimum.
- Flexible, 10-year term.
Availability: Arizona, California, Florida, Indiana, Kentucky, Michigan, Missouri, Nevada, New Mexico, New Jersey, North Carolina, Ohio, Oregon, Pennsylvania, South Carolina, Tennessee, Utah, Virginia, and Washington.
2. Point
- Access up to $500,000.
- Available for long-term agreements (up to 30 years).
- No income requirements.
- Close in as little as 3 weeks.
Availability: Arizona, California, Colorado, Connecticut, Florida, Georgia, Hawaii, Illinois, Indiana, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nevada, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, South Carolina, Tennessee, Utah, Virginia, Washington, and the District of Columbia.
3. Hometap
- Access up to $600,000.
- Receive funds in as little as 3 weeks.
- Financial flexibility for up to 10-year terms.
- Invests in manufactured homes.
Availability: Arizona, California, Florida, Indiana, Michigan, Minnesota, Missouri, Nevada, New Jersey, New York, Ohio, Oregon, Pennsylvania, South Carolina, Utah, Virginia, Washington, and Washington DC.
HEA Uses
Deciding how to use your home equity agreement funds is entirely up to you. It can be used for home improvement or paying 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 may be required to use it to pay off debts first.
Final Thoughts on Using an HEA When You Can’t Get Approved for a Loan
An HEA can be a great choice for homeowners who don’t have the credit needed for a large personal loan, home equity loan, HELOC, cash-out refinance loan, credit card, or otherwise. The credit score and income requirements are much lower than traditional loans because a home equity agreement is not a loan, and there are no monthly payments.
However, there is an origination fee and other transactional expenses involved when entering into a home equity agreement to consider. 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.