When Ricardo and Catherine Soto were looking to buy a home in Chula Vista, they knew that even after selling their old house in El Cajon they would be able to afford a down payment of only about 10%.
But when buying a home, 20% is the magic number. It means not only borrowing less but also avoiding mortgage insurance, which can cost hundreds of dollars a month.
Some cash-strapped home buyers might have opted to tap a relative or retirement savings, but the Sotos tried something new. When they bought their home for $650,000 in September, the couple came up with the 20% after all — thanks to an unusual arrangement with a newcomer to the mass mortgage market.
Unison, a 12-year-old San Francisco company, offered to match the $65,000 that the Sotos brought to the table in exchange for what amounts to an ownership stake in their house.
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The Sotos don’t have to pay anything back — not for a while, at least. But when the couple sell their house they will owe Unison the $65,000 it invested, plus 35% of the value their home gains. Should the market suffer a setback, Unison will share in the loss.
The company, formerly called FirstREX, is one of a handful of firms developing novel financial products aimed at helping buyers afford increasingly expensive homes now that the market has recovered from last decade’s housing bust.
It’s harder than ever to buy a house right now. Credit is still very hard to get. — Jim Riccitelli, Unison co-chief executive
Others, including San Francisco start-up Point, offer similar cash-for-equity arrangements for existing homeowners, but, for now, don’t work with home buyers.
For the last few years, Unison has offered its down-payment product to buyers of pricey homes who need so-called jumbo mortgages. Now the company is going mass market.
It’s working directly with mortgage lenders to offers its down-payment program to buyers looking for ordinary home loans. Government-backed mortgage agency Freddie Mac will purchase loans made to Unison customers through what the agency described as a “very limited pilot.”
Unison’s program could help some buyers get into homes they otherwise could not afford. But housing finance watchers don’t see this as a return to the kind of high-risk lending that sparked last decade’s financial crisis. Unison customers must have good credit, qualify for a standard mortgage and make at least a 10% down payment — much more than what’s required for loans insured by the Federal Housing Administration, for instance.
Still, deals with Unison and other firms are novel and come with a big tradeoff: In exchange for a smaller mortgage, buyers give up a big chunk of the value their homes might gain.
Laurie Goodman, co-director of the housing policy finance center at research group Urban Institute, said it’s important for home buyers to know what they’re getting into.
“Saving money up front in exchange for a share of the upside is a legitimate decision, but it’s one the buyer needs to fully understand,” she said.
For the Sotos, the decision came down not to how much value their home might gain or lose, but the size of the monthly payment.
“For our personal situation, what was most critical was having access to discretionary income because our kids will be going on to college,” said Ricardo Soto, 50, a father of three teenagers. “Having that lower payment and knowing I can count on that was really important.”
Unison is working with four mortgage lenders, including Orange County’s LoanDepot, one of the nation’s largest mortgage originators, and it has deals with three more. Unison is already available to home buyers in California, New York and 11 other states, and will be available in eight more this year.
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