In the United States, many homes are aging out of usefulness, providing opportunities for homebuyers to purchase them at a low price and invest their sweat equity to remodel the home.
To help these homebuyers, Freddie Mac’s Home Possible mortgage allows buyers to pay the mortgage down payment and closing costs with sweat equity.
What Is Sweat Equity?
“Sweat equity,” as we are discussing here, is increasing the value of a property from the materials and labor invested in renovating the property.
When homebuyers are skilled to renovate the property, they can leverage their skill to get a mortgage that allows them to pay the down payment and closing costs with sweat equity. To do this, homebuyers need a Home Possible mortgage by Freddie Mac. The money spent on the renovation, as well as the labor involved for the renovation, can be counted toward the mortgage down payment and closing costs.
How the Sweat Equity Mortgage Works
Homebuyers can’t just do renovations and expect sweat equity to count toward the down payment and closing costs. There is a six-step process involved with the Home Possible mortgage:
- Lender reviews sales contract and orders an appraisal report.
- Lender reviews the appraisal and/or the borrower provided documentation and identifies the value of credit (sweat equity).
- Borrower completes improvements per the specifications identified in the contract.
- Appraiser certifies work was completed according to the specifications identified in the contract.
- Lender completes underwriting.
- Lender delivers the loan to Freddie Mac.
Throughout the six-step process, an appraiser is involved in developing the plan and verifying that the work was completed according to the plan.
- The property is inspected before work is done.
- Repairs and renovations to be done by the buyer are agreed upon by the buyer, lender, and appraiser.
- Any work completed that’s not listed in the appraisal report of the buying contract will not be counted toward the mortgage down payment and closing costs.
Although the process is straight forward, several pieces must be put together for a homebuyer’s sweat equity to be applied toward the down payment and closing costs. Therefore, it is important to work with a highly qualified mortgage broker that helps coordinate each part of the mortgage.
Family Problems Solved
A Home Possible mortgage helps solve two problems for families.
- The down payment and closing costs are often a barrier to homeownership. The Home Possible mortgage helps remove this barrier by allowing buyers to apply sweat equity toward the down payment and closing costs.
- The down payment and closing costs often take all a family’s savings for a single purchase, putting a strain on the family. The Home Possible mortgage again by allowing buyers to apply sweat equity toward the down payment and closing costs.
Benefits for Aging Home Markets
While sweat equity mortgages can be advantageous to homebuyers, they’re also a useful tool to help people buy better homes in an aging market. When homes are older, the work needed to renovate them often overshadows the price savings. Buyers want better homes, but they can’t always afford to renovate them on top of buying the home.
With a sweat equity mortgage, buyers can make a sizeable investment toward renovating the property before moving into the home. This results in making older homes livable again while bringing them up to modern standards.
Sweat Equity Mortgages for Rural and Inner-City Homebuyers
While sweat equity Home Possible mortgages are not restricted by location, they benefit home buyers in areas where homes are older, such as some rural and inner-city areas.
Tighter housing markets with fewer new developments, along with more aging homes, makes homebuying difficult for many families. Without the cash for both the renovation, along with the down payment and closing costs, it can become impossible for many families to afford a livable home in some areas.
Sweat equity mortgage helps homebuyers in areas where homes are older, while also benefiting the entire community by bringing life to older neighborhoods.
Related: Home Possible Fact Sheet
Home Possible mortgages through Freddie Mac are a viable option for homebuyers who need a lower down payment option, while also saving on closing costs. If buyers can complete repairs and renovations skillfully, they and the seller can benefit from a sweat equity mortgage, while also benefiting the community.
Marimark Mortgage is based in Tampa, Florida and serves the mortgage needs of homebuyers, homeowners, and investors in Florida, Virginia, and Pennsylvania.
We specialize in conventional home mortgages, FHA, VA, and USDA mortgage options, refinance loans, and reverse mortgages. We’ve worked extensively with cash-out refinancing, and help clients with HARP refinancing to lower their monthly mortgage payments.