Ayaribire, like all those who request housing assistance through Habitat for Humanity, underwent a detailed evaluation process, took financial education classes and put 400 hours of “sweat capital” for their down payment. His children, now 13 and 15 years old, also helped with the renovation of their home and volunteered in a ReStore, which are the points of sale of Habitat for Humanity for new and used furniture and building materials.
For Ayaribire and others, the process of becoming a homeowner includes physical work and financial preparation.
Programs are not for everyone, they can be difficult to find and qualify for them is not always easy. In addition, buyers would have to reserve a large amount of time, up to 500 hours, depending on the program, to work their volunteer hours.
Still, program leaders say that buyers can save from a few thousand dollars to tens of thousands of dollars. In some cases, they end up without having to make any down payment.
How sweat equity works
Each program has slightly different rules, but in general, the concept of sweat equity is to improve the stock of homes by building new affordable homes or renovating troubled homes with the help of the people who will live there. The hours that these voluntary buyers save on labor costs and can be calculated to function as an advance on the property. Buyers must also qualify for the mortgage with a credit profile, work history and sufficient income to pay off the loan.
“An important misconception about Habitat for Humanity is that it is a gift program for low-income households,” says Reverend John Smoot, executive director of Habitat for Humanity in Northern Virginia in Alexandria. “We are actually a general contractor and a credit institution. We are regulated by the federal government like any other lender.”
Not all loan programs or lenders allow accumulated capital to be used to purchase a home, and many of them require the participation of a nonprofit organization to manage hours of accumulated capital.
Freddie Mac recently introduced the accumulated capital in his down payment options for his Home Possible loan program.
“The Home Possible mortgage requires a down payment of 3 percent, but that money can come from a gift, a grant from an initial payment assistance program, your family members or your employer,” says Danny Gardner, Senior Vice President of affordable single family. loans to Freddie Mac in Washington, DC “Allowing sweat equity is just one more way to add flexibility to sources of down payment.”
The Home Possible program is limited to households with an income equal to or less than 80 percent of the average income of the area depending on the size of their household. For example, in the Washington area, the average income is $ 121,300 for a four-person household. Accumulated capital can cover 100 percent of closing costs and down payment for this loan program.
“The idea is that a seller must be willing to let the buyer work in the house before the purchase,” says Gardner. “Everything has to be documented in the purchase contract and an appraiser must take into account the value of the renovation work in the property evaluation.”
Gardner says the program is so new that no one has participated yet, but says that a seller might be willing to do this instead of negotiating the repair before the sale or through a credit to the buyers.
“An example when this could be attractive is if a house is vacant or is a sale of goods,” says Gardner. “We see that this works well in an area where neighbors know and trust each other and may be willing to accept that a buyer come to do the work before closing. Of course, all this would also be supported by an evaluation. ”
Another scenario planned by Gardner is a partnership between a nonprofit community development organization and buyers.
Gardner says the Freddie Mac sweat equity program is based on the successful USDA Self-Help and Mutual Housing Program, which is also known as the Section 523. This program provides grants to nonprofit organizations to help them supervise groups. of low-income families to work in the homes of others, according to Bruce W. Lammers, administrator of the USDA Rural Housing Service in Washington, DC
“Self-help applicants work together in groups of four to 12 families in each other’s homes in rural communities and small towns, and generally receive a direct loan from the USDA,” Lammers wrote in an email. “The USDA direct loan offers a reduced mortgage payment with an effective interest rate of 1 percent. An initial cash payment is not required and some closing costs can also be financed. ”
Self-help applicants must qualify for the mortgage to show that they can pay the loan and must earn 80 percent or less of the average income of the area for their family size.
They must complete 65 percent of the workforce required to build the houses in the group until all are completed, Lammers wrote. In some cases, an older home can be rehabilitated with this program.
In Milford, Delaware, for example, Milford Housing Development Corp. has been working with churches and civic groups for 20 years to help families build or renovate homes. While the maximum income allowed for its programs is 80 percent of the area’s median income, Russell Huxtable, vice president and chief operating officer of Milford Housing Development Corp., says that most participants earn 50 percent of the median income of the area.
“Borrowers receive credit counseling and financial education training to make sure they can repay the loan,” says Huxtable. “We work with applicants to meet USDA standards, which means they cannot have two late mortgage or rent payments in the past two years, an IRS lien or foreclosure in the past 36 months. Also we try to incorporate closing costs in accumulated capital to reduce your cash needs. ”
Huxtable says that loans and family circumstances are reviewed every two years after closing and, sometimes, borrowers’ payments increase if their income can accommodate them to pay part of the government subsidy of their loan.
“This is a great option for people here because otherwise they could not own a house,” says Huxtable. “Most of our participants are single heads of household with children, with an average income of $ 30,000. The average sale price of homes in this area is $ 300,000, so they could never pay it for themselves. ”
Smoot says that most of the families that serve in Habitat for Humanity in northern Virginia earn between 50 and 80 percent of the area’s average income.
“We work with for-profit developers to create some houses for our families from their portfolios and look for public land, but there is very little available in Alexandria and Arlington,” says Smoot. “We build condominiums and townhouses, as well as single-family homes and we also perform some complete renovations.”
To qualify, families apply through the Habitat for Humanity website. Families are filtered, prioritizing those who live in insecure, distressed, overpopulated or inadequate housing, says Smoot.
“We meet with families and make sure we can keep their home payment at a maximum of 32 percent of their income to make sure they are successful homeowners,” says Smoot.
Applicants have two 30-year mortgages with zero interest, he says, and Habitat for Humanity has the first right to refuse if they want to sell in the future.
“If the borrowers remain in the house for 30 years, they own it for free and clearly, but if they sell it before, they recover what they paid and share the capital,” says Smoot. “If they sell in the first year, 100 percent of the proceeds would go to Habitat for Humanity, so we prevent someone from trying to turn a house around. But we have very little rotation. ”
Fannie Mae allows sweat capital to be an acceptable source of funds for your HomeReady mortgage loans if the lender can prove that the mortgage is part of the HomeReady program and the loan program is managed by a solid and experienced nonprofit organization, according to lender Fannie Mae. Service guide When sweat capital is accepted, borrowers must also contribute at least 3 percent of the purchase price of their own funds. For example, on a property of a unit financed with a HomeReady loan, a down payment of 5 percent is required, of which 2 percent may come from accumulated capital.
Education is a main requirement.
An unexpected benefit to sweat equity, says Ayaribire, is the training it received.
“I had never done anything like that, but we helped with the construction, painting and laying of floors and I loved it,” she says. “I want to volunteer and do more even if my house is finished.”
Ayaribire also thanked the financial advice she received to help her develop a budget and find ways to save that would make it easier for her to pay for her home.
At Habitat for Humanity, applicants must complete 50 hours of sweat equity before starting the intensive financial counseling program, says Smoot, then another 350 hours of sweat equity are required.
“Many of our applicants are working on two or three jobs, so we give them many ways they can do their hours,” says Smoot. “Some of them spin hammers, but they can also help us with customer service, work in the office or work in the ReStore. You don’t have to be able to do this, but you do have to have some capacity to work in a house. “
Nonprofit organizations such as Habitat for Humanity and Milford Housing Development Corp. have supervisors who provide on-site training and guidance for volunteers.
“Volunteers don’t do things like the base, electrical or plumbing work, but they can do framing, cladding, insulation, painting, cutouts and cabinets,” says Huxtable. “Labor savings are significant.”
The group concept of the Milford program, no one can move until everyone’s house is finished, is like an Amish barn, says Huxtable.
“There is a shortage of housing and it is difficult for people to save for the down payment, so a sweat equity program can help renew the stock of old homes in this country and help people achieve their property goals of housing, “says Gardner. “The challenge is to familiarize everyone with the concept and relate people who have the ability to be part of their own work with the right project and loan.”
You cannot directly contact several sweat equity programs. To find one, look for local nonprofit organizations that offer housing assistance and ask local lenders if they can help you with a USDA, Home Possible or Home Ready mortgage.