Should I get a home equity agreement? If your answer is yes, here are the best companies

A home equity agreement (HEA) — also known as home equity sharing or home equity investment — can be a strategic tool for homeowners to tap into their home equity, especially if they have poor or bad credit and lack the liquidity to make a monthly payment. 

Here's how it works: The homeowner sells a portion of their equity to a home equity investment company for cash. In exchange, the investment company receives what it paid plus a portion of the home's future appreciated value, calculated at the end of the term or when the homeowner sells the house, whichever comes first. 

But it's not the best option for everyone: While there are no monthly payments and no interest on a HEA, you must pay the full amount — plus a risk assessment fee that can be as much as 30% of your home's appreciation — all at once. Like a home equity loan or line of credit lender, the investment company will have a claim to your house if you fail to do so, and can force you into foreclosure. 

So how do you determine if an HEA is right for you? CNBC Select will walk you through that decision and recommend the best companies. 

Because home equity agreements typically have low minimum credit and income requirements, they can be a good option for several groups of people who may not qualify for a traditional home equity loan or line of credit. 

Here’s who may want to consider an HEA: 

Homeowners who have bad credit 

Home equity agreements have minimum credit score requirements as low as 500, compared with home equity loans and lines of credit, which require a credit score of 620 to 680 to apply.

Homeowners who are equity-rich and cash-poor 

Because a home equity agreement company, upon signing a contract with a homeowner, has a claim to a portion of the home’s value, it is less stringent about how much the owner must earn and more concerned with how much equity the homeowner possesses. 

For that reason, most HEAs don’t have income requirements, whereas lenders for home equity loans and lines of credit typically require a debt-to-income ratio of 43% or less. 

Most HEAs require 20% to 40% equity to qualify, while home equity loan and line-of-credit lenders require as little as 10%.

Homeowners with non-W2 jobs

Because these companies are less rigid about income requirements, homeowners who have jobs that don't require a W-2 — like freelancers, self-employed people, or gig workers — may have better luck with an HEA than with other types of mortgages. 

What would you use a home equity agreement for? 

Like with any product that allows you to tap into your home equity, you can put the money toward anything you want — from paying off debt to making an investment in your business to funding a luxurious vacation. But that doesn’t mean you should. 

In fact, many experts recommend only pulling money from your home for very specific reasons. Namely, to invest in things that will increase your net worth down the road, such as renovating your home or starting a small business. 

Home equity agreements come with significant risks.

For one, you’ll owe a large lump sum at the end of the term or when you move out (more on that below). There’s no way to tell how much you’ll owe because it’s a percentage of your home's future value, which — for the most part — is determined by the overall market. 

Helene Raynaud, senior vice president of business initiatives at Money Management International, a financial services company, previously told CNBC Select that HEAs are a risky product. 

“Some of these investors will give you up to $500,000. All of a sudden, you have all this cash,” she said. “The important thing is to make sure you understand what you’re getting into and can stick to your goals with that money.”

You should talk to a housing expert to determine whether this option is best for you and, if so, how to prepare to make an on-time payment when the term ends or when you sell. 

If you decide a home equity agreement is best for you, here are our top picks for lenders. 

Hometap

Select likes Hometap because its risk assessment fee is capped at a lower rate than its competitors. As of May, it is available in 19 states: Arizona, California, Florida, Indiana, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nevada, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, South Carolina, Utah and Virginia.

Point

We like Point for its strong customer service record: It has an A+ rating from the Better Business Bureau, higher than competitors like Hometap, which has a B+. 

As of May, it is available in Washington D.C. and 27 states: Arizona, California, Colorado, Connecticut, Florida, Georgia, Hawaii, Illinois, Indiana, Kentucky, Maryland, Michigan, Minnesota, Missouri, Nevada, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, South Carolina, Tennessee, Utah, Virginia, Washington and Wisconsin. 

In general, a home equity loan or line of credit is a cheaper, less risky way to tap into your home equity.  While you will have to repay the loan monthly, you won’t owe the bank a piece of your home’s appreciated value and the interest rate will likely be less than the risk assessment fee you’ll pay with a home equity agreement. 

If you're interested and have the credit history, income and job history to qualify for a HELOC or home equity loan, look into your options. Here’s how the two types of financing compare to a home equity agreement:

It also makes sense to put the money you get from a home equity loan or line of credit into a wider array of expenses. For example, paying off high-interest debt with a home equity agreement is probably a bad idea; doing so with a home equity loan with a much lower rate than the credit card debt itself may actually be a good move. 

If you think a home equity loan or line of credit is a better choice for you, here are some of our favorite lenders: 

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At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed financial decisions. Every mortgage review is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of home loan products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

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