What Is a Shared Ownership Scheme and How Does It Work?

A shared ownership scheme offers an alternative path to homeownership for individuals who might otherwise find it challenging to enter the housing market. It generally involves purchasing a portion of a property and paying rent on the remaining share. This approach aims to make homeownership more accessible by reducing the initial financial burden compared to a full market purchase.

Understanding the Shared Ownership Concept

Shared ownership, also known as shared equity homeownership, is a model designed to create affordable housing opportunities. This concept allows individuals to purchase a percentage share of a home, while a non-profit organization, local government, or community land trust retains ownership of the remaining portion. The homeowner secures a mortgage for the share they purchase, and concurrently pays a reduced rent on the unowned share held by the program provider.

A prevalent form of shared equity is the Community Land Trust (CLT) model. In a CLT, the trust maintains permanent ownership of the land, while the homeowner purchases the house situated on that land. This arrangement involves a long-term ground lease between the homeowner and the CLT. The separation of land and home ownership helps to keep the property affordable across generations by removing the cost of the land from the initial purchase price.

Other shared equity models include deed-restricted homeownership and limited equity cooperatives. Deed-restricted homes involve a subsidy that reduces the purchase price, with restrictions placed on future resale prices to ensure ongoing affordability for subsequent eligible buyers. Limited equity cooperatives involve purchasing a share in a cooperative that grants the right to occupy a unit, with resale prices regulated to maintain affordability.

Eligibility and Application Process

Accessing shared equity homeownership programs involves meeting specific eligibility criteria established by the program provider. Requirements include being a first-time homebuyer. Applicants must demonstrate an annual household income that falls within a defined range, at or below a certain percentage of the Area Median Income (AMI). The home purchased through the program must also serve as the buyer’s primary residence.

The application journey begins with interested individuals attending an informational meeting or homebuyer education workshop offered by the program. These sessions provide a comprehensive understanding of the program’s benefits and requirements. Following this, a pre-application or initial assessment helps determine basic eligibility before a full application is submitted.

A step in the process is obtaining pre-approval from a mortgage lender approved by the shared equity program. Program-approved lenders understand the unique financing structures of shared equity properties. Minimum credit score requirements vary by lender but range from 620 to 650. Once the application is complete and pre-approval is secured, the program provider assesses eligibility, which can take 7 to 10 business days.

Financial Components and Staircasing

Shared equity homeownership involves several financial components beyond a traditional mortgage. Homeowners secure a mortgage only for the percentage share of the property they initially purchase, which can range from 10% to 75% of the home’s value. This reduced mortgage amount leads to lower monthly principal and interest payments compared to a full market-rate loan. In addition to the mortgage, homeowners pay a monthly occupancy fee or ground lease fee on the portion of the property not owned, which functions similarly to rent.

Beyond mortgage and rent, shared equity homeowners are responsible for standard homeownership costs. These include property taxes, homeowners insurance, and common area maintenance fees. These ongoing costs contribute to the overall financial commitment of shared equity homeownership.

A feature of shared equity programs is “staircasing,” which permits homeowners to purchase additional shares of their property over time. This process allows homeowners to gradually increase their ownership percentage, up to 100%, thereby reducing their monthly rental payments. To staircase, the homeowner requests an independent valuation of the property to determine the current market value of the additional shares they wish to acquire. Legal and administrative fees are associated with each staircasing transaction, and the homeowner may need to adjust their mortgage or use cash savings to fund the purchase.

Selling a Shared Ownership Property

Selling a shared equity property involves a distinct process that differs from a conventional home sale. The distinction is that the program provider has a “right of first refusal” (ROFR). This means the homeowner must first notify the program provider of their intent to sell, giving the provider the initial opportunity to find an eligible buyer or, in some cases, to repurchase the property. This period, called a “nomination period,” can range from 4 to 8 weeks.

During this nomination period, the program provider coordinates an independent valuation of the property to determine its current market value. This valuation is important because shared equity homes are sold at a restricted price to ensure ongoing affordability. The seller’s profit is limited to a predetermined, modest share of any appreciation, with the remaining appreciation retained by the program to maintain affordability. If the program provider successfully finds a buyer within the nomination period, the sale proceeds, including the homeowner’s share of appreciation, are managed according to the program’s specific terms.

If the program provider does not find a buyer within the allotted time, the homeowner may then be permitted to sell the property on the open market. However, the resale restrictions remain in effect. Legal counsel is advisable to navigate the specific clauses in the deed restriction or ground lease, ensuring compliance with program rules.