No, I don’t mean collecting sweat. That would be gross.
However, you can use labor as a form of down payment.
Let’s face it, buying a home can be costly. First, there is financing for the new home, then there’s the down payment, appraisal fees, and finally closing costs at escrow.
It’s something everyone dreads.
This is why Freddie Mac and Fannie Mae offer programs to relieve the consumer of having to pay their down payment with money and instead apply sweat equity.
What is Sweat Equity?
First lets define what sweat equity is.
It is the non-monetary investment that a homebuyer contributes to their new property in need of renovation. Basically it is based on the amount of labor a homebuyer puts into fixing up their new residence.
Yes you read that right.
Not only can a homebuyer’s labor be counted as down payment on a property, but it also gives the homeowner a sense of accomplishment and satisfaction in their handiwork.
How to get it…
There are currently two programs that will accept sweat equity as a form of down payment. The first and best option is HomePossible that Freddie Mac offers. The second is the HomeReady program through Fannie Mae, which has more requirements.
Both programs are considered home renovation programs meant to either fix up a home or to make improvements to a home.
But wait – It gets better!
With HomePossible a homebuyer can use up to 5% of the property value as sweat equity towards down payment. This can be used on a primary residence, investment property, condos, and even manufactured homes. Better yet, the equity can also be used toward closing costs!
With HomeReady, the minimum down payment required is 5%, of which 2% can be sweat equity. That means that the homebuyer will still need to contribute 3% of their own funds.
HomePossible requires that a homebuyer make any repairs listed in the sales contract and provide their own materials. An appraiser will need to assess the work to be completed and the value of the work. Sweat equity cannot be applied prior to an appraisal of the property. So a homebuyer will need the appraiser to verify that there needs to be work done. Further more, the homebuyer will need to complete the work themselves and provide their own materials.
HomeReady has the same requirements with the addition of a condition. The condition is that the loan program has to be managed by a strong, and experienced nonprofit organization such as Habitat for Humanity.
For more information on how to make your sweat count, reach out to us today.