Home Equity Investments: A Guide for Referral Partners

Helping Clients Evaluate Another Way to Access Home Equity — Without Adding a Required Monthly Payment

As a trusted advisor, your clients may occasionally come to you with a financial need that has an obvious asset sitting behind it:

Their home equity.

The challenge is that accessing that equity has traditionally meant taking on additional debt and another monthly payment through a HELOC, home equity loan, or cash-out refinance.

For some clients, those may still be excellent choices.

But they aren't the only choices.

A Home Equity Investment (HEI), also commonly referred to as a Shared Equity Agreement (SEA) or Home Equity Agreement (HEA), may allow a qualifying homeowner the ability to access a portion of their equity without a required monthly payment and without traditional interest charges.

Instead, an investor provides cash today in exchange for an agreed-upon share of the home's future change in value.

Depending upon the investor and program, the agreement may remain in place for as long as 30 years.

An HEI isn't appropriate for every homeowner, and it shouldn't automatically be viewed as a replacement for traditional financing.

But for the right client and the right situation, it can provide another financial-planning tool worth considering.

The Referral Partner's Role Isn't to Recommend an HEI

This is an important distinction.

You don't need to understand every underwriting guideline, calculate the investor's future share, or determine which home-equity program is best for your client.

That's my job.

Your role is simply to recognize situations where accessing home equity might help your client accomplish a financial objective.

From there, I can review the client's situation, explain the available options, compare potential costs and tradeoffs, and let the client decide whether an HEI—or another home-equity solution—makes sense.

And if the answer is “don't touch the equity,” that's a perfectly acceptable outcome too.

What You'll Learn in This Guide

1. What Is a Home Equity Investment?
2. Why Should Referral Partners Know About HEIs?
3. Which Clients Might Be Worth Referring?
4. The Financial Planner Conversation
5. The Realtor Conversation
6. The CPA or Tax Professional Conversation
7. The Estate-Planning Conversation
8. Helping Adult Children and Family Members
9. Business Owners and Self-Employed Clients
10. Clients Who Don't Want Another Monthly Payment
11. Clients Who Don't Qualify for Traditional Financing
12. Protecting a Client's Existing First Mortgage
13. HEI vs. HELOC vs. Home Equity Loan
14. Understanding the Potential Cost of an HEI
15. Important HEI Limitations and Tradeoffs
16. Questions You May Hear From Clients
17. What Happens After You Refer a Client?
18. When Should You Call Me?
19. A Simple Referral Checklist

1. What Is a Home Equity Investment?

An HEI allows a homeowner to receive a lump sum of cash based partly upon the equity in the property.

Unlike a traditional home-equity loan:

• There is no required monthly payment
• There is no traditional interest rate
• The homeowner continues to own the property
• The investor receives an agreed-upon share of the home's future change in value
• The agreement is eventually settled according to its terms

Depending upon the investor and program, an agreement may remain in place for up to 30 years.

The homeowner receives liquidity today.

The investor receives the opportunity for a future return.

That's the basic exchange.

2. Why Should Referral Partners Know About HEIs?

Because sometimes the client's problem isn't a lack of assets.

It's a lack of liquidity.

A client could have substantial home equity while simultaneously:

• Carrying high-interest debt
• Needing cash for another investment
• Wanting to help an adult child
• Facing a large upcoming expense
• Trying to preserve retirement cash flow
• Holding appreciated securities they would prefer not to liquidate
• Owning a low-rate first mortgage they don't want to replace
• Having difficulty qualifying for traditional financing
• Wanting to purchase another property
• Needing capital for a business

An HEI won't necessarily be the right solution.

But knowing that the option exists can change the conversation.

The Opportunity

Instead of asking:

“Does my client qualify for a HELOC?”

The better question may be:

“What is the most appropriate way for this client to access equity—if they should access it at all?”

3. Which Clients Might Be Worth Referring?

You don't need to prequalify anyone.

A conversation may be worthwhile when a homeowner has substantial equity plus a legitimate need or financial objective.

Some examples might include a client who:

• Wants liquidity without another required monthly payment
• Has difficulty documenting income
• Has a high debt-to-income ratio
• Wants to preserve an existing low-rate first mortgage
• Needs funds for home improvements
• Wants to help children purchase a home
• Wants funds for another real-estate purchase
• Needs business capital
• Wants to consolidate expensive debt
• Is considering selling investments to raise cash
• Is approaching or already in retirement and wants to preserve monthly cash flow
• Has been declined for a traditional HELOC or second mortgage

You don't need to know whether the client qualifies.

The situation itself is enough reason for us to have a conversation.

4. The Financial Planner Conversation

This is where HEIs can become particularly interesting.

Suppose a client needs $100,000.

The obvious source of funds may be an investment account.

But liquidating investments could have consequences that go well beyond simply producing $100,000 of cash.

Depending upon the client's circumstances, the advisor may want to consider issues such as:

• Capital gains
• Loss of future investment growth
• Portfolio allocation
• Retirement-income strategy
• Sequence-of-returns considerations
• Cash-flow needs
• Estate or legacy objectives

That doesn't mean using home equity is automatically better than selling investments.

It means both sides of the balance sheet deserve consideration.

A financial planner can continue evaluating the investment, tax, retirement, and planning consequences while I evaluate the available home-equity alternatives.

Then the client can compare them.

A Better Question

Instead of:

“Should we sell $100,000 of investments?”

The conversation becomes:

“What are all the available sources of $100,000, and what are the short- and long-term consequences of each?”

That's a much more useful planning conversation.

5. The Realtor Conversation

Realtors encounter home-equity opportunities in several different ways.

A homeowner may want to:

• Purchase another property before selling the current home
• Help a child with a down payment
• Renovate the current home rather than move
• Purchase an investment property
• Access equity without refinancing an attractive first mortgage
• Resolve a financial issue that might otherwise force a sale

For some homeowners, selling may still be the correct decision.

For others, accessing equity could create an alternative they hadn't considered.

The Realtor doesn't need to recommend the financing.

Simply asking:

“Have you looked at all of your home-equity options before deciding?”

can open the door to a useful conversation.

6. The CPA or Tax Professional Conversation

CPAs and tax professionals may encounter clients considering:

• Selling appreciated investments
• Taking large retirement distributions
• Liquidating other assets
• Funding business expenses
• Helping family members financially
• Making major purchases

An HEI may provide another potential source of liquidity.

However, tax consequences are outside my role as a mortgage professional, and HEI proceeds and settlements can have tax implications depending upon individual circumstances.

That's why collaboration can be valuable.

I can explain the financing and HEI structure.

The tax professional can advise the client regarding tax consequences.

Neither of us needs to do the other's job.

7. The Estate-Planning Conversation

Home equity can represent a substantial portion of a family's net worth.

Some homeowners may want to access that equity during their lifetime to:

• Help children or grandchildren
• Fund education
• Assist with a home purchase
• Provide an early inheritance or “living legacy”
• Improve their own retirement lifestyle
• Establish additional reserves

An HEI can potentially provide liquidity without adding a required monthly payment.

But there is another side to the equation:

An HEI can reduce the amount of future home equity ultimately available to the homeowner or heirs.

That's precisely why estate-planning professionals should be part of the discussion when appropriate.

The question isn't simply:

“Can the homeowner access the money?”

It's:

“How does accessing the money today affect the homeowner's longer-term estate objectives?”

8. Helping Adult Children and Family Members

This may be one of the easiest referral opportunities to recognize.

A homeowner may have significant equity but limited liquid assets.

Meanwhile, an adult child may need help with:

• A down payment
• Closing costs
• Paying off debt to qualify for a mortgage
• Education
• Starting a business
• Another major financial need

Rather than automatically selling investments or taking on a traditional monthly loan payment, the homeowner may want to compare an HEI with other alternatives.

This can also become part of a broader family financial-planning conversation.

9. Business Owners and Self-Employed Clients

A homeowner can be financially successful and still have difficulty qualifying for traditional mortgage financing.

Business owners and self-employed borrowers may have:

• Complicated tax returns
• Significant deductions
• Irregular income
• High debt-to-income ratios on paper
• Substantial assets but limited qualifying income

Depending upon the investor, HEI qualification can be more flexible than traditional mortgage underwriting.

Some programs may require income documentation, while others may have reduced or different documentation requirements.

The point isn't that every self-employed homeowner qualifies.

It's that a traditional mortgage decline doesn't necessarily end the home-equity conversation.

10. Clients Who Don't Want Another Monthly Payment

Sometimes a client qualifies perfectly well for a HELOC or home equity loan.

They simply don't want another required monthly payment.

That can be particularly relevant for retirees or homeowners focused on monthly cash flow.

An HEI may solve the payment issue.

But eliminating a monthly payment doesn't eliminate the cost.

The client is exchanging some future home appreciation for liquidity today.

That tradeoff should be understood clearly before proceeding.

11. Clients Who Don't Qualify for Traditional Financing

An HEI may also deserve consideration when traditional financing isn't available because of:

• Credit
• Income documentation
• Debt-to-income ratios
• Employment circumstances
• Other underwriting issues

Under the primary program we're using as a guideline, a credit score around 620 is a general starting point, although lower scores may be eligible through other HEI programs.

Some HEI structures may also offer substantially more flexibility with debt-to-income ratios than traditional mortgage financing.

Don't assume a client doesn't have options simply because a bank said no.

12. Protecting a Client's Existing First Mortgage

This can be a major consideration in today's home-equity conversation.

Suppose your client has a substantial first mortgage at an attractive interest rate.

A cash-out refinance could require replacing that entire mortgage simply to access a relatively small portion of the home's equity.

For example, replacing a $500,000 first mortgage to obtain $100,000 of cash means the client isn't just financing the new $100,000.

They're also changing the financing terms on the existing $500,000.

A HELOC, home equity loan, or HEI may allow the existing first mortgage to remain untouched.

That doesn't automatically make one of those choices better.

But it means we should evaluate the whole financing picture, not simply the rate attached to the new money.

13. HEI vs. HELOC vs. Home Equity Loan

Referral partners don't need to determine which product wins.

But understanding the basic differences helps.

The appropriate choice depends upon the client's goals, qualifications, cash flow, existing financing, expected holding period, and tolerance for sharing future appreciation.

14. Understanding the Potential Cost of an HEI

This is where referral partners need to understand enough not to oversell the no-payment feature.

Under the structure we're using as our primary example, the investor's share increases with the amount of equity accessed.

For example, on a $1,000,000 home:

There can also be a starting-value adjustment. Under the primary structure used in this guide, a $1,000,000 appraisal would result in a $950,000 starting value for calculating future appreciation.

That can materially affect the eventual settlement.

The Important Message

No monthly payment does not mean no cost.

That's why I believe clients should see an actual comparison rather than make a decision based solely upon today's cash proceeds.

15. Important HEI Limitations and Tradeoffs

Referral partners should also understand the other side of the product.

Depending upon the agreement, an HEI may:

• Reduce the homeowner's future equity
• Become expensive if the property appreciates significantly
• Affect a future refinance
• Limit future HELOC or second-mortgage borrowing
• Require settlement after a specified term
• Include an initial restriction period
• Treat an early voluntary buyout differently from a normal sale
• Require the homeowner to maintain the property
• Affect the amount of equity eventually passing to heirs

These aren't necessarily reasons not to use an HEI.

They're reasons the client needs to understand the agreement before making the decision.

16. Questions You May Hear From Clients

You don't need to answer these yourself.

In fact, I'd rather you didn't have to.

Clients may ask:

“How much can I get?”

“What credit score do I need?”

“Do I need to show income?”

“How much of my appreciation will I give up?”

“What happens if my home goes down?”

“Can I pay it off early?”

“Can I refinance later?”

“Can I still get a HELOC?”

“What happens if I sell?”

“What happens if I die?”

“Would a HELOC be cheaper?”

Those are exactly the questions I can address with the client.

17. What Happens After You Refer a Client?

When you introduce a client to me, I'm not assuming an HEI is the answer.

I'll first learn what the client is trying to accomplish.

Then we'll look at factors such as:

• Amount of cash needed
• Home value
• Existing mortgage balance and rate
• Available equity
• Credit
• Income and qualification
• Monthly-payment tolerance
• How long the client expects to own the property
• Likelihood of refinancing
• Intended use of the money
• Other available home-equity solutions

Where appropriate, I can compare an HEI with a HELOC, fixed home equity loan, alternative-documentation program, reverse second mortgage, or other available solution.

Then I'll explain the advantages and disadvantages in plain English.

The client decides.

18. When Should You Call Me?

You don't need to decide whether an HEI makes sense before calling.

A much easier rule is:

If a client has substantial home equity and needs liquidity, call me.

Even if:

• Their credit isn't perfect
• Their income is difficult to document
• They were already declined elsewhere
• They don't want a monthly payment
• They already have a HELOC or second mortgage
• You're not sure an HEI is appropriate

There may be another solution in the home-equity toolbox.

And occasionally, after reviewing everything, the best recommendation may simply be:

Leave the equity alone.

That's still a successful review.

19. A Simple Referral Checklist

You may have a potential referral if your client:

☐ Owns a home with substantial equity
☐ Needs or wants access to cash
☐ Wants to avoid another required monthly payment
☐ Wants to preserve an existing first mortgage
☐ Has difficulty qualifying conventionally
☐ Is considering liquidating other assets
☐ Wants to help children or family members
☐ Needs capital for another property or business
☐ Is approaching retirement or focused on cash flow
☐ Has already been declined for home-equity financing
☐ Isn't sure which equity option makes sense

If you check even one or two of those boxes, we can have a conversation.

You don't need to prequalify the client or explain the programs.

That's what I'm here for.

A Collaborative Approach

The best referral relationships aren't built around pushing a particular product.

They're built around solving problems.

You know your client's broader financial, real-estate, tax, or estate-planning objectives.

I know the financing and home-equity options.

When those two areas overlap, we can work together to help the client understand the choices available to them.

Sometimes that may be an HEI.

Sometimes it may be a HELOC or home equity loan.

Sometimes it may be another solution entirely.

And sometimes the best decision may be to do nothing at all.

The objective is not to sell the client an HEI. It's to make sure they don't overlook an option that could help them accomplish their financial goals.

Robert “Rob” Clark
Home Loan Consultant
Firestone Financial Group

Call or Text: 209-227-7745
Alternate: 559-476-9279
Email:rbrtclark53@gmail.com
Website: robertclarkloans.com

NMLS #357788 | Firestone Financial Group NMLS #301522
CA DRE #01148307 | Equal Housing Lender

Important Information

Program availability, eligibility requirements, credit requirements, income requirements, property requirements, investment amounts, valuation adjustments, fees, agreement terms, investor percentages, settlement calculations, appreciation-sharing provisions, remodeling adjustments, restriction periods, and other terms vary by investor and are subject to change.

A Home Equity Investment, Home Equity Agreement, or Shared Equity Agreement is not a traditional mortgage loan and generally does not require monthly principal and interest payments. The investment must ultimately be settled according to the applicable agreement.

This guide is intended for general educational purposes and is not an offer, commitment, financial-planning recommendation, tax advice, legal advice, or investment advice. Clients should carefully review applicable agreement documents and consult their financial, tax, legal, and/or estate-planning professionals as appropriate.