If you are interested in a vacation property or second home, you may wonder about financing fractional home ownership. Before you move forward, it’s important to understand what fractional homeownership is and how financing works.

Fractional Ownership Overview

Fractional ownership usually deals with owning a vacation property where several owners use it based on units of time. So, only one homeowner is allowed to use the property during a certain time.

A fractional ownership policy can be used for a single-family home or apartment complex, and even a resort facility.

In a multi-family unit, each owner may own all the units, some, or only one. Also, usage rights and costs may or may not relate to rights of ownership.

A group using fractional home ownership can be set up by a real estate development business, building, seller, realtor, or various numbers of buyers and property users. Some also set this arrangement up with friends and family.

How Fractional Ownership Is Different Than A Timeshare

A timeshare usually means several people share a property based on units of time, whether they own it or not. But there are several differences between timeshares and fractional ownership you should know.

It isn’t true that the difference between timeshares and fractional ownership is only whether the title to the property has been conveyed to the buyers. Attorneys in real estate will tell you that some timeshares may have titled ownership and some fractional properties don’t.

The misconception above may lead to some misunderstandings:

  • The assumption that restrictions and regulations on timeshares don’t apply to fractional ownership
  • The buyers don’t evaluate the vital parts of a real estate deal to check if the fractional ownership is better than a regular timeshare.

The major differences between the two arrangements are:

  • How much each person’s rights and responsibilities are limited to a home or group of homes.
  • How much each buyer owns and controls the property.

Having ownership to a home doesn’t mean that another owner can use the home. And having ownership also doesn’t give a co-owner any control over the way that the home will be maintained and managed.

Why Consider Fractional Ownership of a Vacation Property?

how to finance fractional home ownership  

Many people want a vacation home but cannot afford what they want. Or they won’t use the property enough to justify the cost.

Fractional ownership is a viable option to these issues by allowing the co-owners to pay part of the ownership and expense costs of owning the home.

They also can share the risks of unknown maintenance issues that can crop up.

However, as you spread the costs and risks, you will give up some rights to use the home as well as the freedom of having full ownership.

But having school and job responsibilities may prevent most of us from using our vacation homes for more than two or three weeks per year.

How To Finance Your Fractional Ownership Property

Now that you understand more about fractional ownership, let’s discuss how to finance that dream home.

There are four ways that you can finance this kind of home. First, you can buy your ownership stake outright, but most of us don’t have $100,000 or more in liquid funds to do that.

Next, you can tap the equity in your home with a second mortgage or equity line of credit. Doing this has many advantages. You can get a HELOC easier than a regular mortgage. You also can get a low interest rate with most second mortgages. Consider 2nd mortgage rate options and compare the home equity loans and HELOC.

Securing a mortgage for fractional property ownership can be difficult and is uncommon in the mortgage industry. Traditional mortgages are designed for equal ownership of a property, but fractional ownership brings added complexities that might deter many lenders.

Developer & Property Manager Financing Options

Many developers collaborate with banks to provide seamless financing solutions. Typically, a down payment ranging from 20% to 50% of the share price is required, with the loan being amortized over a short duration of 5 to 10 years. Below are some examples of traditional financing provided by fractional ownership firms as of May 2024:

  • Pacaso: Offers financing for up to 70% of the share.
  • Ember: Provides discounted financing  on select properties.
  • Vivla: Allows financing up to 100% of the share.

The other option is to obtain mortgage funding for your fractional home ownership acquisition. There are many mortgage companies that offer financing products for this situation.

You may be able to borrow up to 80% of the value of the home, so you may need to tap liquid funds or your home equity for the rest. In a few cases, the developer may offer to finance 10% of your share of ownership, you put down 10% and you get regular mortgage for the rest.

But remember that credit requirements could be stricter for fractional ownership than a regular home loan. Many mortgage companies want to see a 700-credit score and a DTI of no more than 45%. Some lenders may have more flexibility for those with a 650-credit score.

Regarding documentation, it’s the same as a regular second home loan. So, you can expect to provide information on your assets, income, and liabilities. If you have all your paperwork in order, you may be able to close this loan in a few weeks.

The last option to finance a fractional ownership deal is to use financing that is offered by the developer. You usually need a 20% down payment for this kind of financing, and the loan may be amortized over five years, but a balloon payment at the end can probably be financed. Learn more about investment property loans.

Many people want to own a vacation home but have trouble affording it or justifying the expense. When you finance a fractional home ownership arrangement, you may be able to afford what you never dreamed of.

It’s crucial to differentiate between co-ownership and fractional ownership. In a typical co-ownership scenario, such as when two individuals buy a house together, they usually split ownership equally. However, in fractional ownership, one of the owners might hold a larger or smaller portion of the property than the other(s), which differs significantly from the equal share structure of traditional co-ownership.