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What if you could trade sweat equity for a cash down payment and closing costs?


By Jeff Lazerson


What I think: Talk about a timely gesture with Hanukkah, Christmas and Kwanzaa just around the corner. This week Freddie Mac gave the go-ahead to unlimited sweat equity to count toward your down payment and closing costs through its enhanced Home Possible Mortgage program.

That’s right! Buy your home with no money down and a well-priced mortgage to boot.

Sweat equity refers to materials provided and/or labor completed by a borrower prior to close of escrow. The value of the materials furnished must either be estimated by the appraiser or a cost-estimating service or be calculated using receipts from the purchase of the materials. The labor value also must be estimated by the appraiser or a cost-estimating service. Labor must also be completed in a skillful manner.

The concept is to help renovate aging homes, particularly for borrowers in rural and underserved communities, and at the same time, increase homeownership opportunities. That said, this loan program is available anywhere.

Here is how it works:

  1. Find a home in need of repair, renovation and improvement.
  2. The repairs, renovations and improvements you plan to do must be listed in the sales contract.
  3. Any work completed prior to the appraisal will not count toward the buyers’ down payment and closing cost credits.
  4. Initial appraisal and property inspection are completed.
  5. Lender reviews the materials list and the labor cost.
  6. Do not start working until you receive confirmation that your lender approved the credits.
  7. Perform the work listed in the sale contract.
  8. Appraiser reinspects and confirms work completion in a skillful manner.
  9. Underwriter then credits X amount of material and labor toward the down payment and closing costs.
  10. File is fully underwritten, and (hopefully) approved and your loan then funds.

The general rules state:

  1. Applicant is supposed to be a first-time homebuyer, but there are several exceptions in which you can still qualify even if you own other property. You must occupy this new property.
  2. Household income caps are $69,300 for Orange and Los Angeles counties, $65,800 for Riverside and San Bernardino counties and $81,800 for San Diego County. If you are over the cap, some income may not have to be counted. And, not all areas have income-cap restrictions. For example, Compton and San Bernardino County have no income limitations. Go to freddiemac.com/homepossible/eligibility to confirm.
  3. Maximum loan amount with 3 percent down for a single unit in Orange, Los Angeles, Riverside, San Bernardino and San Diego counties is $453,100. Two-to-four units and manufactured homes require 5 percent down. Next week, Freddie Mac’s regulator and conservator, Federal Housing Finance Agency is highly likely to boost those loan limits per my recent column.
  4. Orange and Los Angeles counties allow so-called Freddie Mac super conforming loan amounts to $679,650 and San Diego County goes to $649,750, all with a minimum of 5 percent down.
  5. Your middle credit score can be as low as 620. Mortgage insurance is required on all loans with less than 20 percent down.

It is imperative that you have a skillful negotiator write up your contract with the seller because you will need to add time for the project completion. And, require your loan officer to deliver an additional and complete loan pre-approval (not just the materials and labor dollar totals) after the initial appraisal inspection is completed — and before you pour your money, time and energy into the property improvements.

Happy holidays indeed!

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Jeff Lazerson - Mortgage Columnist since 2011