Sweat equity can count toward a down payment in some loans

For people buying their first home, the high cost of a down payment can be a difficult hurdle to overcome. First-time buyers who are willing to roll up their sleeves may also gravitate toward lower priced properties that need some repairs, adding "sweat equity" to the home by completing this necessary work.

Some loan programs are targeted directly at these buyers. Instead of scraping together a hefty down payment on a property, a person can put the value of their home improvement skills toward the purchase of a home.

These programs have seen some expansion recently. Ben Lane, writing for HousingWire, says Freddie Mac recently expanded its "Home Possible" mortgage to allow certain buyers to use sweat equity as their entire down payment.

The goal of sweat equity loan offerings is to help people who might be stymied by the financial requirements of a home purchase. It also looks to spur the improvement of residences, particularly in rural or underserved areas.

While some programs will be open to a wide range of applicants, others will have certain restrictions. Jeff Lazerson, president of the mortgage company Mortgage Grader, says a sweat equity loan may only be available to a borrower purchasing their first home. The loans may also only be open to buyers earning less than a capped income, and will typically establish a limit for how much money can be borrowed.

The Home Possible mortgage allows borrowers to put the value of their construction labor or the materials they purchase for the project to help cover the down payment instead of contributing cash. Sweat equity can also be applied toward the closing costs of the home purchase.

Any work must be documented on the home contract and appraisal, and the buyer must cover at least 3 percent of the purchase price. The program also says that an appraisal or cost-estimating service must confirm the value of these services, and that any work must be "completed in a skillful manner."

Naturally, a buyer's ability to contribute sweat equity won't be much of an incentive if the home they're buying is already in good repair. Denny Ceizyk, writing for Lending Tree, says homes listed "as is" are the best candidates for sweat equity programs, and are priced to reflect the work that will need to go into the property. These sellers recognize that repairs are needed, but are unable or unwilling to complete them.

The sales contract should reflect any repairs or improvements you plan to complete as part of the loan program. An appraisal will determine the value of this work to help determine what the price will be before the improvements and what it will be once they've been completed.

While many buyers may be eager to start swinging a hammer in their future abode, they should hold off until these steps are completed. Lazerson says any work completed before an appraisal won't count toward a down payment or closing costs. You should also hold off on starting the repairs until the lender has approved the credits the sweat equity will contribute to the home purchase.

After the work is completed, an appraiser will check out the property again to confirm that the repairs were done properly. This visit will also determine if the value of the sweat equity matches the terms of the agreement.

The value of the work as determined by the appraisal will be credited toward the loan amount. Ciezyk says the loan amount is then finalized and you'll just need to provide any necessary documentation to close the transaction and begin making regular monthly payments on the newly upgraded home.

In general, the work you put into a house will improve its value. However, there is a certain risk that falling real estate values or other factors may make the home worth less than its original asking price, even after repairs have been completed. If this situation occurs, you may find yourself having to make up the difference.

In addition to the Home Possible mortgage, other programs are designed to have buyers contribute to the improvement of a residence before you move in. Jaymi Naciri, writing for Realty Times, says the Department of Housing and Urban Development recently awarded $10 million in grants to nonprofit housing organizations to support sweat equity programs, with more than half going to Habitat for Humanity.

In order to qualify for a Habitat for Humanity home build, a person has to submit an application to their local chapter. Applicants must meet certain requirements, such as falling within a certain income range based on the number of people in the household. Selected families are usually required to contribute a certain number of hours toward building or renovating a home, and may also be asked to attend a course on how to manage the expenses of homeownership.

Sweat equity programs are also available through the Federal Housing Administration. Ciezyk says this program requires a minimum down payment of 3.5 percent, which can be made with sweat equity if it is documented appropriately.


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