You want to buy a home. You’re handy and a hard worker. You’re short on cash (or would rather not part with your cash).
How cool would it be if you could turn your skills into the down payment on a home?
You can… with sweat equity!
What is Sweat Equity?
Sweat equity is the slightly weird (and, if we’re being honest, slightly gross) name for work done by you or materials provided by you (or on behalf of you) prior to closing on the home you are buying. The value of your labor and the money you spend on materials is applied to your home purchase, just like an equivalent amount of personal funds.
Buying with Zero Cash
Sweat equity allows you to substitute your labor (and/or supplies) for cash. There is no limit to the amount of sweat equity you can apply to a home purchase. Complete enough work on the home you are buying and you may not have to put down a penny of cash.
This is huge, as traditional loans require cash up front — often quite a lot of cash. Down payment options start at 3% of the price of your new home in cash — and even more to cover closing costs, insurance, taxes and more. Down payment assistance programs (like this one or this one) offer relief, but often carry a higher interest rate.
Sweat equity offers a path to no down payment without paying a higher-than-market interest rate.
Leveraging your Cash
Even if you have the cash to put 3%, 5% or more down payment option, sweat equity could be a way to add value. Your labor plus a faction of your cash may cover your down payment. Keep the rest of your cash as a cushion or to complete more work after closing.
The sweat equity program is part of Freddie Mac’s “Home Possible” family of loans. Home Possible is a conventional loan that is subject to income limits by area. The look-up tool is here. The qualifying income for all borrowers must not exceed the applicable limit. Although, note that many areas have no income limit.
You can use sweat equity to buy a single family home, condo, townhome, duplex, triplex, four-plex or manufactured home.
The minimum down payment varies depending on the type of property and can be paid by any combination of sweat equity and cash contribution.
You do not need to be a first-time homebuyer to use sweat equity, but you cannot own any other real estate at the time of closing.
Eligible work must be negotiated
Any repair or improvement is a potential source of sweat equity, but to be eligible it must be written into your sales agreement. List the work you will do and the materials you will provide… but don’t start any work yet. Wait until the appraiser has inspected and turned in their report.
Work completed prior to the day the appraiser visits the property is not eligible to be included in your sweat equity. If the appraiser notes a repair or improvement was done as of the day they inspect the home you are buying, it won’t count toward your down payment. So be patient.
Your lender will provide the list of improvements you plan to make to to the appraiser. The appraiser will estimate the value of the work. If you are a contractor or tradesperson write up a “bid” for the work you plan to complete, just as you would for a client. If you’re not in the trades, see if your home inspector or a contractor can help you with an estimate of costs. This will help the appraiser.
All work must be completed in a “workmanlike” manner. After you’ve completed the agreed-upon work, the appraiser will come back to verify the work is done… and was done well.
Keep Good Records
It’s important to note that the work you propose will not be financed into your loan. You must buy any materials you need, outside of loan funds. And although you will receive credit for the work you do, you will not be paid for your labor. If the value of the work you complete exceeds your required down payment, your loan may be reduced, but you won’t get any cash back.
Hang onto your receipts and keep records of the money you spend. Don’t charge materials without talking to your lender and don’t pay for materials with cash. The underwriter may ask you to provide receipts for materials you purchased. Paying cash makes documenting the funds you used difficult and may disqualify the value of some materials. Charging materials on a credit card could hurt your credit score or increase your debts and invalidate your loan approval.
I’m not handy but I know people who are
If you don’t have skills but your family or close friends do, you’re in luck. Gifted sweat equity is a Thing. Include the agreed-upon work in your sales agreement. Your lender will work with you to document the gifted sweat equity.
Is aunt a general contractor? Is your cousin an electrician? Does your dad sell windows and doors? See hit them up and see if they can hook you up!
What’s the catch?
If this sounds too good to be true, you may be wondering what the catch is. There isn’t exactly a catch, but there are things to keep in mind. In the real world, sweat equity has some risks to both the seller and the buyer:
Risks to the Seller
All the work has to be completed prior to closing. So you need a seller willing to let you work on their home. If you are a contractor, electrician, roofer or other tradesperson (or the person who will be doing work on your behalf is), the seller may be more open-minded to allowing work. After all, you have expertise and a license and bond. Even then, there is a risk you may do shoddy work, quit before the work is done, damage the house or yourself.
What if you are just an enthusiastic amateur? Sellers may be (understandably) reluctant to allow you start tearing into their home.
Risks to the Buyer
You have risks too. You are going to be spending time, energy and money making improvements to a home you don’t own yet. Work with your Realtor to write a strong contract. You will want to make sure the seller doesn’t have any “out” that would let them cancel the sale and keep your work. If there is any question about how long the work will take (or weather slowing things down), allow ample time.
Talk to your Landlord
When is sweat equity most likely to work out? When you already know the seller. If you know someone thinking of selling a property they own — maybe even your landlord — work with your real estate broker to see if they’d be open to selling to you. Buying a home you already live in can make sweat equity so much simpler. You and the seller already know and (hopefully) trust one another. And you already have keys and access to the home.
Interested in using sweat equity for a home purchase? Here’s how you can expect things to go:
- Step 1: Get pre-approved – Verify you are eligible for the program and determine your price.
- Step 2: Find a home / Negotiate terms – Negotiate a contract to buy your new home. List the repairs and improvements to be made with all the other terms. Don’t forget to allow enough time to complete the repairs after the appraisal, but before closing.
- Step 3: Appraisal – Appraiser completes report “subject to” repairs and includes value of repairs.
- Step 4: Do the Work – Complete the specified work.
- Step 5: Verification of Work – Appraiser visits the home to confirm work is complete and done in a “workmanlike” manner.
- Step 6: Close – At closing you’ll receive a credit for the value of all of your hard work!
Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. Receipt of application does not represent an approval for financing or interest rate guarantee. Restrictions may apply, contact Guaranteed Rate for current rates and for more information.
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