Short on cash to buy a home? Roll up your sleeves, and use sweat equity as a down payment.
“Sweat equity,” is a form of investment that replaces cash toward the down payment on a home. The amount of sweat equity is based on the buyer’s contribution of labor, plus reimbursement of any materials purchased.
If you have the chance to buy a “fixer-upper,” you can cover all–or part of your down payment with sweat equity. Before signing an offer to purchase, you would obtain a repair cost estimate from a professional estimating company that itemizes what the repairs would cost if completed by a licensed contractor.
For example, a property seller agrees to sell you a home “as is” for $152,000. The estimator states that it would cost $8,000 to paint the entire exterior of the house and garage. You would provide this estimate to a mortgage lender, who will explain your mortgage options. The lender will ask the real estate appraiser to prepare an “as completed value,” report that is based on the description of work to be completed. In this scenario, the as-completed value would potentially be $160,000.
All you have to do is buy the paint, round up some friends, and borrow a few ladders.
Here’s how it works on paper. The lender draws up a purchase transaction for $160,000. At closing, the seller gets $152,000. Your contribution of labor is worth $8,000, and applied toward your down payment. Generally, work can be completed after closing. Sweat equity is available on conventional mortgages, FHA and VA mortgages. Freddie Mac offers a program that allows sweat equity to cover the down payment and certain closing costs.
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