Sweat equity can be a push up to homeownership

Michele Lerner

THE WASHINGTON POST – When Clinical Technician at Inova Hospital and single mother of two boys Joyce Ayaribire wanted to leave her Alexandria, Virginia apartment in the United States (US) because she was concerned about the safety of the neighbourhood, she didn’t think purchasing a home would be an option.

“I wanted to buy a house if I could, but I didn’t have the cash for a down payment and I didn’t know how I could qualify for a loan,” Ayaribire said. “A co-worker told me about Habitat for Humanity, so I applied online and a little over a year later my boys and I live in the condo I own in Lorton.”

Ayaribire, like everyone who applies for housing help through Habitat for Humanity, underwent a detailed screening process, took financial education classes and put in 400 hours of “sweat equity” for her down payment. Her boys, now 13 and 15, also helped with the renovation of their house and volunteered in a ReStore, which are Habitat for Humanity’s retail outlets for new and used home furnishings and building materials.

For Ayaribire and others, the process of becoming a homeowner includes physical labour as well as financial prep.

Habitat for Humanity may be among the best-known sweat equity programmes, but others include USDA direct loan programme, Fannie Mae’s HomeReady mortgage and Freddie Mac’s Home Possible mortgage. These loan programmes are primarily designed for lower-income households.

Volunteers work on one of the homes that is being built by Habitat for Humanity in Alexandria.PHOTO: THE WASHINGTON POST

The programmes are not for everyone – they can be difficult to find and qualifying for them is not always easy. Plus, buyers would have to set aside a large chunk of time – as much as 500 hours, depending on the programme – to work their volunteer hours.

Still, programme leaders said buyers can save anywhere from a few thousand dollars to tens of thousands of dollars. In some cases, they end up not having to make any down payment.

Each programme has slightly different rules, but in general, the concept of sweat equity is to improve the housing stock through building new affordable homes or renovating distressed ones with the help of the people who will live there. The hours those buyers volunteer save on labour costs and can be calculated to function as a down payment on the property. The buyers must also qualify for the mortgage with a credit profile, job history and income sufficient to repay the loan.

“A major misconception about Habitat for Humanity is that it’s a low-income giveaway home programme,” said Executive Director of Habitat for Humanity of Northern Virginia in Alexandria John Smoot. “We’re actually a general contractor and a lending institution. We’re regulated by the federal government like any other lender.”

Not every loan programme or lender allows sweat equity to be used towards a home purchase and many that do require the participation of a non-profit organisation to manage the sweat equity hours.

Freddie Mac recently introduced sweat equity to its down-payment options for its Home Possible loan programme.

“The Home Possible mortgage requires a three pre cent down payment, but that money can come from a gift, a grant from a down-payment assistance programme, family members or your employer,” said Senior Vice President of single-family affordable lending at Freddie Mac in Washington, DC Danny Gardner. “Allowing sweat equity is just one more way of adding flexibility to down payment sources.”

The Home Possible programme is limited to households with an income at or below 80 per cent of area median income based on their household size. For example, in the Washington area, median income is USD121,300 for a four-person household. Sweat equity can cover 100 per cent of closing costs and down payment for this loan programme.

“The idea is that a seller has to be willing to let the buyer work on the house prior to the purchase,” Gardner said. “Everything has to be documented in the purchase contract and an appraiser has to factor in the value of the renovation work into the property assessment.”

Gardner said the programme is so new that no one has participated yet, but he said a seller might be willing to do this instead of negotiating to have repairs done before the sale or through a credit to the buyers.

“An example when this might be appealing is if a house is vacant or it’s an estate sale,” Gardner said. “We see this working well in an area where neighbours know and trust each other and might be willing to accept a buyer coming in to do the work before the closing. Of course, this would all be supported by an appraisal, too.”

Another scenario anticipated by Gardner is a partnership between a non-profit community development organisation and buyers. Gardner said the Freddie Mac sweat equity programme is modelled on the successful United States Department of Agriculture (USDA) Mutual and Self-Help Housing Programme, which is also known as the Section 523 programme.

This programme provides grants to non-profit organisations to help them supervise groups of low-income families to work on each other’s homes, according to Administrator of the USDA Rural Housing Service in Washington, DC Bruce Lammers.

“The self-help applicants work together in groups of four to 12 families on each other’s homes in rural communities and small towns, and typically receive a direct loan from USDA,” Lammers wrote in an email.

“The USDA direct loan offers a reduced mortgage payment with as low as an effective one per cent interest rate. There is no cash down payment required and some closing costs can be financed as well.”

The self-help applicants must qualify for the mortgage to demonstrate that they can afford to repay the loan and must earn 80 per cent or less of area median income for their family size.

They must complete 65 per cent of the labour 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 programme.

To qualify, families apply through the Habitat for Humanity website. The families are filtered, prioritising those who live in unsafe, distressed, overcrowded or inadequate housing, Smoot said.

“We meet with the families and make sure we can keep their housing payment at a maximum of 32 per cent of their income to make sure they’ll be successful homeowners,” Smoot saod.

The applicants have two 30-year mortgages with zero interest, he said, and Habitat for Humanity has the first right of refusal if they want to sell in the future.

At Habitat for Humanity, applicants must complete 50 hours of sweat equity before they begin the intensive financial counselling programme, said Smoot, then another 350 hours of sweat equity are required.

“Many of our applicants are working two or three jobs, so we give them lots of ways they can do their hours,” Smoot said. “Some of them swing 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 skilled to do this, but you do have to be somewhat able-bodied to work on a house.”