Homebuyers battling high mortgage rates could soon have a new option: sell a stake in their future home for as much as $250,000 toward a down payment

• A handful of companies offer homeowners cash in exchange for a stake in their home.
• The next frontier: making similar investments to buyers who need help with a down payment.
• Companies face significant obstacles to bringing this product mainstream.

Companies backed by some of the world's biggest investors are doling out tens of thousands of dollars in cash to homeowners in exchange for a stake in their homes.

These types of deals aren't yet widely available to first-time buyers who haven't built up equity, however.

The housing market today is fraught for these mostly younger buyers who must contend with inflation, stubbornly high home prices, and mortgage rates that have more than doubled over the past year. In this environment, coming up with enough money for a sizable down payment can seem downright impossible.

But some companies are getting ready to provide hunks of cash to homebuyers who don't mind giving up something in return: a piece of their future home equity.

These deals represent the next frontier for companies like Point, Unlock, and HomePace, which already offer so-called home-equity investments to homeowners who are rich on paper but don't want to pursue traditional debt options, like home-equity lines of credit, to tap into that wealth.

"It's an equalizer for those who don't have generational wealth," Eoin Matthews, a cofounder of Point, said. "We think it has mass-market appeal."

Home-equity-investment deals took off earlier in the pandemic as skyrocketing home values pushed US homeowners' equity to a record $29 trillion, Federal Reserve data showed. Point, one of the largest of these companies, has originated nearly $1 billion worth of such deals since it was founded in 2015, with much of that volume coming in the past year, Matthews said.

Now these companies see an opportunity to snag more market share by working with buyers who are desperately looking to increase their purchasing power in the face of mortgage rates that are hovering around a 20-year high.

Several companies told Insider they're forging ahead with down-payment products, and Point noted its planned debut was just weeks away. While volumes could be significant, they probably won't rival standard home-equity investments because of the additional challenges posed by sales transactions, company executives said.

Companies believe they can tackle the affordability crisis by fronting the money for down payments

Home-equity investments only recently gained broad acceptance as a legitimate asset class after companies proved their viability through years of successful returns. Down-payment products could follow a similar trajectory, Point's Matthews said. His own company will offer investments of up to 15% of the purchase price of a home, or a maximum amount of $250,000, he said.

Buyers typically are required to get private mortgage insurance when they put down less than 20% of the purchase price for their home. Down-payment investments could help them avoid those costs, which can amount to hundreds of dollars a month.

Jim Riccitelli, the CEO of Unlock, estimated some buyers could improve their purchasing power by as much as 30%, which he called "a huge boost."

"The affordability problem is, unfortunately, not going away anytime soon. So we're gearing up for that," Riccitelli said, adding that down-payment investments represented "a massive opportunity."

HomePace, which was founded in September 2020, is another proponent of down-payment investments, and is developing such a product in partnership with Lennar, the nation's second-largest homebuilder. In December, the company closed on a $7 million Series A funding round led by LenX, Lennar's corporate venture arm.

The wait list for the company's planned offering includes buyers from 35 states and Washington, DC, Joe Cianciolo, HomePace's CEO, said in an email.

"Once rates become less volatile, there will be a large opportunity for HEIs to greatly improve affordability for people not able to buy a home in the current environment," Cianciolo said in the email.

Of course, these deals come with trade-offs since buyers will be required to give up some of their home equity. And there are challenges that have prevented this product from going mainstream.

Why it's so hard to make down-payment investments work

In a traditional home-equity-investment deal, there are only two parties: the homeowner who agrees to give up a percentage of the future value of their home and the company offering the investment.

Down-payment investments function in a similar way — a lump sum of cash today in exchange for a slice of equity in the future — but are more complicated since they also require coordination with the mortgage lender, at least two real-estate agents, and the seller to make sure the home transaction closes smoothly and on time.

Fannie Mae and Freddie Mac, the government-sponsored enterprises that purchase the vast majority of US mortgages, won't buy loans made to buyers that use such equity investments. At least for now, that limits the down-payment-investment market to the smaller portion of buyers who are willing to go the route of nonqualified mortgages, which typically have higher interest rates.

Combine all these factors, and it's not hard to see why down-payment investments have yet to catch on, despite the fact that home-equity-investment companies have been around since the mid-2000s. Indeed, one of the industry's trailblazers, Unison, stopped offering down-payment investments earlier in the pandemic, choosing instead to focus on traditional home-equity agreements.

What's more, one fintech executive who requested anonymity to protect business relationships doubted that any down-payment offerings would emerge within the next year. Companies haven't rushed to market, the person said, because that kind of investment is a "very difficult product to make decent margins on."

"One of the big mortgage companies is going to have to get in on it," the executive added.

Matthews said the product could initially make sense for high earners such as doctors or lawyers who haven't reached their full earning potential and are willing to take on a nonqualifying mortgage, such as a jumbo loan.

He added that he's optimistic that Fannie and Freddie would one day be willing to buy loans made out to buyers taking advantage of this product.

"But it won't happen overnight," Matthews said. "It's a big effort."