How a Home Equity Agreement (HEA) Works

If you’re a homeowner, you may have several options to access some of the equity you have in your house. One of those options, a home equity agreement, can be worth considering if you don’t qualify for traditional loan options or can’t afford an additional monthly payment.

However, home equity agreements can be expensive and give you less flexibility. Here’s what you need to know about how home equity agreements work, why and where you might get one, and what to consider before you apply.

What is a home equity agreement?

A home equity agreement (HEA), is an arrangement between you and an investment firm. Unlike other home equity financing options, an HEA is based on your property’s future value. 

However, because an HEA isn’t a traditional loan, it doesn’t have the same strict requirements as a home equity loan, home equity line of credit (HELOC), or cash-out refinance loan. Most HEAs are settled with a balloon payment, so you don’t need to make monthly payments.

A home equity agreement can be worth considering if you need cash but have less-than-stellar credit or can’t afford to make monthly payments. However, this option is often more expensive than the alternatives, making it less compelling if you have good credit.

Our top choices let you receive free quotes to see how much funding you can receive while evaluating the costs.

How does a home equity agreement work?

An HEA offers a lump-sum payment, which can range from 15% to 35% of your home’s value, in exchange for a payment based on your home’s future value at a later date. The amount you pay, which could be anywhere from 5% to 70% of your future home value, is based on when you settle and how much your home has appreciated in value.

You’ll typically have 10 years to settle, though you may need to do so sooner if you sell the home or refinance your mortgage loan. A similar product called a home equity investment can offer longer terms.

Traditional lenders don’t offer HEAs. Instead, you’ll need to work with specialized home equity sharing companies. Some of the eligibility requirements include:

• Home equity: You’ll typically need to have at least 20% equity in your home, but this depends on the lender’s requirements. For example, if your home is worth $400,000, your total mortgage secured by the home can’t be more than $320,000. So if your total mortgage balance is greater than $320,000 and your lender requires 20% equity or more, you can’t use the equity from your home right now.
• Credit score: You can typically qualify for an HEA with a credit score of 500 or above, which is lower than the standard 620 minimum score requirement for home equity loans and HELOCs.  
• Debt-to-income ratio: Providers may or may not evaluate your debt-to-income ratio (DTI), which is the percentage of your gross monthly income (before taxes and deductions) that goes toward debt payments. The typical limit is 45% when considered, which is higher than the industry standard of 30%.
• Other secured debts: Most HEA providers require their loan to have the first or second lien position on the home, meaning they’re first or second in line for payment in the event of foreclosure. If you have an outstanding first and second mortgage loan, you may not be eligible.
• Property type: You can typically get approved for a home equity agreement if you have a single-family home or a multifamily home with up to four units. Manufactured homes, farms, and larger multifamily properties are usually ineligible.
• State of residence: HEAs aren’t available in all 50 states, and certain providers operate in fewer states than others. Depending on where you live, you may not have the option.

HEAs typically come with an origination fee, which can be as much as 4.9% of the funding amount. However, no interest charges or monthly payments are required. 

Home equity agreement example

To give you an idea of how HEAs work, let’s say that your home is worth $500,000, and you have about $200,000 in equity. 

In exchange for 20% of your current home value, or $100,000, you agree to pay 30% of your home’s future value in 10 years. The provider charges a 4% origination fee, costing you $4,000 upfront. 

Let’s say your home appreciates in value by 6% per year, giving you a value of about $895,000. At that point, you’d need to settle the agreement by paying a lump sum of $268,500. 

If you don’t have the cash on hand to settle, you’d need to sell the home, obtain a home equity loan or HELOC, or get a cash-out refinance loan to get the funds. 

Home equity agreement pros and cons

Here are several advantages and disadvantages of an HEA to consider before you apply.

Pros

• Easier approval

  If your credit score isn’t sufficient to qualify for a second mortgage or a cash-out refinance, you may have an easier time getting approved for a home equity agreement. Your income usually isn’t an eligibility factor.

• No monthly payments

  Instead of paying off what you owe over time, you’ll make a balloon payment at the end of your term or when you sell your house or refinance your mortgage loan. This can be a huge benefit if you can’t afford another monthly payment.

• Lower closing costs

  In some cases, the origination fee can be much lower than that of a home equity loan or HELOC. If you don’t have much cash on hand, you can opt to have it deducted from your disbursement rather than paying out of pocket.

Cons

• Can be expensive

  Because your settlement amount is based on your home’s future value rather than its current market value, you could end up paying far more than you would with a traditional loan. It’s also impossible to know the true cost upfront.

• Balloon payment

  Not having monthly payments can help with budgeting, but if you don’t have much cash and don’t want to sell your home, you may need to take out another loan to pay for it. If you don’t qualify for a loan, you might need to sell to avoid foreclosure.

• Not available everywhere

  HEAs are only available in select states, so even if you want one, you may not have the option.

Is a home equity agreement a good idea?

Understanding your needs and goals is important to determining whether an HEA is right for you. Tapping your home equity can be a good way to invest in home renovations or pay off high-interest debt. 

You may also consider an HEA if you’re experiencing financial difficulties and don’t have access to other financing options with more stringent requirements. 

But as with any other financing option, it’s important to consider the costs. Because of their high cost potential and the lack of certainty about what your balloon payment will be, it’s best to consider a HEA only if you can’t get access to more affordable options.   

It also means an HEA likely won’t be a good option for financing needs that aren’t pressing. In the end, it’s crucial that you take your time to evaluate your needs and research and compare your options.

When an HEA might make sense	When an HEA might not make sense
✅ Your credit is in poor shape	❌ You have great credit
✅ Your budget is tight, and you can’t afford a monthly payment	❌ You can afford a monthly payment
✅ You don’t have access to less expensive financing options	❌You want a revolving line of credit
✅ You plan to sell your home to cover the balloon payment	❌ You want to maximize your savings

Our expert’s advice

Erin Kinkade

CFP®

The initial factor anyone should consider before entering into a home equity agreement is the purpose of the agreement: Are the funds for a need or want? Is this something that can be delayed until you improve your credit scores and reports or lower your debt-to-income ratio? These actions can result in an increased probability you’ll be approved for a HELOC or home equity loan, which can offer better rates and terms. In addition, the repayment amount could place you owing much more than you borrowed and in a shorter time than other types of loans. Are you comfortable with this risk, and if so, what is your plan to repay? Do you have a Plan B in case the initial plan doesn’t work out?

How to apply for a home equity agreement

Once you’ve evaluated your options, here are four steps you can take to apply for a home equity agreement:

1. Shop around: HEA providers can vary in eligibility criteria, funding amounts, and costs, so it’s important to shop around and compare your options. You can submit a funding request through each provider’s website, providing basic information about yourself and your property to get an estimate of how much money you may be able to get.
2. Complete a full application: Once you’ve determined which provider offers the best terms, submit a full application through its website. You’ll also need to provide documents, such as a recent mortgage statement, a homeowners insurance declaration, and a government-issued photo ID.
3. Get an appraisal: To finalize how much you qualify for, the HEA provider will typically require an appraisal of your home. 
4. Complete the process: Once the HEA provider completes the underwriting process, it will give you a final offer. If you agree to the terms, you’ll sign the agreement and provide your banking information to receive the funds.

Once you get the funds, you can use them however you want. 

Alternatives to HEAs

If you’re unsure whether a home equity agreement is right for you, explore how a home equity loan, home equity line of credit, cash-out refinance, and home sale-leaseback compare with an HEA.

Home equity loan

A home equity loan is a practical alternative because it allows you to borrow against the value of your home. Unlike an HEA, it comes with monthly payments and interest, but you’ll know exactly how much the loan will cost before you close on it.

Home equity line of credit

A HELOC is a flexible credit product that lets you borrow when you need it. It requires monthly repayments plus interest. It’s best suited to those who need recurring access to funds.

Cash-out refinance

A cash-out refinance gives you a lump sum by replacing your current mortgage with a new one for a larger amount. You get immediate cash, but it’s different from an HEA because you’ll owe monthly payments and interest. Consider the risks associated with increasing your mortgage before you pursue this option.

Home sale-leaseback

A home sale-leaseback lets you sell your home and lease it from the new owner. It provides immediate liquidity like a HEA, but it’s different in that you lose ownership of your home. This could be beneficial for immediate fund requirements but has limitations, such as ongoing rental payments.