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Updated: Jun 02, 2023

How Shared Appreciation Mortgage (SAM) Works

Learn How shared appreciation mortgage benefits increase home shoppers' buying power and helps to reduce down payments.
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The benefits of a Shared Appreciation Mortgage (SAM) and similar products are getting a lot of attention from down payment-light homebuyers, especially those seeking more buying power in fast-appreciating areas of the country like California’s Silicon Valley and the second Silicon Valley in Orange County, Calif.

Although there are different varieties and variations of shared appreciation mortgages, the SAM currently in fashion in California is typically an arrangement in which a lender provides a portion of the homebuyer’s down payment, requiring no monthly repayment of interest or principal, in exchange for a share of the home’s appreciation when the home is sold.

“Actually, it’s a program with a long history,” said Bill McGuire, Southern California sales director for FirstREX, an investment company that contributes up to half of the buyer's required down payment in exchange for a percentage of the future value of the home (up or down).

“It started among family members, say, an uncle helping out his nephew with a down payment on a house. If the house showed a return when it was sold, the uncle might see a return. That was the genesis of the loan.

“Now, that same model has been scaled up and institutionalized by pension funds and others who have long-term horizons and want to gain exposure to the multi-trillion dollar real estate market.

"Since the buyer pays us no interest or monthly payment, one could say that the homebuyer doesn't pay us, the home does.”

While the shared appreciation mortgage benefits are obvious to investors like FirstREX, and its lender partners like HomeStreet Bank, RPM Mortgage and Banc Home Loans that provide the traditional mortgage, the benefits are equally apparent to high-income homebuyers, who see swapping a portion of their future appreciation (usually they get 60 percent of the profit) for help with a down payment today as a fair and smart exchange to get the house of their choice.

Benefits give home shoppers more buying power

Providing help with the down payment, which doesn’t require any principal or interest repayment, is an attractive loan feature that gives home shoppers more buying power, according to Mark DeWitt, Vice President and Branch Manager with HomeStreet Bank in Carlsbad, Calif., which works with FirstREX in providing down payment assistance of up to $500,000.

He gave an example of that buying power on a $1 million home:

The Challenge

Buyer's combined household income: $175,000

Cash available for purchase: $125,000

Price of desired home: $1,000,000

Required down payment (20 percent): $200,000

Down payment shortfall: $75,000

The Solution

Buyer's share of down payment: $100,000

Third-party investor's share of down payment: $100,000

Jumbo mortgage: *$800,000

Buyer's cash reserve at closing: $25,000

*The $800,000 has to be financed with a jumbo mortgage. Use the MyBankTracker's mortgage calculator to see what payments would be on this amount or another amount, depending on the size of the home you’re considering for purchase.

Without the down payment program, the buyer would've been short $75,000 plus failed to have come up with the down payment, which would have left him with limited options.

This includes the possibility of having to wait months or years until he could save up for the rest of the down payment, while also losing the opportunity to take advantage of current low interest rates.

Or he could have settled for a lesser home, perhaps one with a longer commute or less desirable school district for the kids.

Ideal for certain buyers

DeWitt said the down payment program is a great option for the right buyer, especially in areas where the prices have run far ahead of the people’s ability to save for a down payment.

“It’s ideal for young professionals who are making good money and can easily make the monthly payments, but who haven’t been able to save the 20 percent yet, somebody like a software engineer who has recently graduated. It gets his foot in the door, even before he’s paid off all his student loans.”

“A down payment funding program changes the game,” McGuire added, “making it possible for homebuyers who can afford to live in a great neighborhood to actually live there."

With the partner’s $100,000 (or half of the required $200,000 down payment), the buyer could easily afford the million-dollar home, with $25,000 to spare. Also, by managing to put 20 percent down, the buyer avoids paying costly private mortgage insurance or PMI, further reducing the buyer’s monthly mortgage.

Shared appreciation mortgage benefits provide extra cash

Meanwhile, the buyer can use the extra money to furnish the home, make improvements or start a rainy-day fund.

“A lot of buyers are uncomfortable using all their money to purchase,” McGuire said. “With a product like ours, buyers can still get the nice house they want without having to drain their bank account.”

Scott Davis, a mortgage lender with RPM Mortgage in Manhattan Beach, Calif., said he likes the SAM for that same reason.

“It gives buyers a financial cushion to fall back on versus liquidating everything and putting it all in the house,” he said. “Like the old adage says, don’t put all your eggs in one basket.”

Added FirstREX client, Ivo Labar, “Their matching the down payment allowed me to keep as much cash on hand as I could.”

To qualify for down payment funding, clients have to be as creditworthy as they would have to be for most other mortgage products. At FirstREX, that usually means a minimum FICO of 680.

At the same time, lenders like HomeStreet Bank and RPM Mortgage aren’t going to lend on just any property. Again, they’re almost betting more on the collateral, which the property represents, than on the borrower, because, after all, they only realize a profit on an appreciating property.

“The property must be 'typical' for the neighborhood,” McGuire noted. “For example, we might not invest in a property on a 10-acre lot located in the middle of an area where all other homes are situated on one-acre lots.  Unusual properties, such as log cabins, are unlikely to qualify.”

And this also includes if the property has fallen in value, a scenario that could happen (as if anyone needs reminding how sharply real estate prices fell in the wake of the Great Recession).

“We share in both the profits and the losses,” McGuire said, “but our investors believe in the long-term prospects and appreciation of real estate."

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