What is sweat equity?
First off, it is important to define what sweat equity is: when you use your own labor and skills to make repairs or improvements to a home. Making repairs, renovations or upgrades should improve the value of the property and increase your homeowners equity. Because you are doing the work yourself and not paying for an independent contractor or other third party service provider, it is called sweat equity.
How could sweat equity be used as a down payment?
Now that you understand what sweat equity is, you may be wondering how it could be used as a down payment to buy a home. Don’t you need to make your down payment in cash? The best way to explain this is with an example.
Let’s say you want to buy a home for $95,000 but you have no money saved for a down payment. There are programs such as the VA Home Loan Program and USDA Mortgage Program that enable you to buy a home with no down payment but most low down payment mortgage programs require you to put down 3.0% to 3.5% of the property purchase price. If you do not have the funds for a down payment, you cannot qualify for these programs and buy the home.
Review Best Low Down Payment Mortgage Programs
However, if you put in $5,000 in sweat equity to improve the home, that effectively becomes your down payment. For example, maybe you upgrade the plumbing, apply a new coat of paint or make structural fixes to the property. All of these renovations boost the value of the home based on the value of your labor and the materials you invest.
After the improvements you make, the home is valued at $100,000 but you still only need to borrow $95,000 to buy the home, which is the original purchase price. In this case, the mortgage represents 95% of the purchase price, which means you are making a down payment of 5% in the form of sweat equity. A 5% down payment also enables you to qualify for almost all low down payment programs so you should be able to qualify for a mortgage to buy the property.
What mortgage programs allow you to use sweat equity for your down payment?
Now that you understand how sweat equity can be used for a down payment on a home, the next step is to find mortgage programs that allow it, which can be challenging. In short, not many lenders or mortgage programs permit you to use sweat equity for your down payment.
Assessing the value of the repairs and the timing of when the work is completed creates complications and challenges that most mortgage lenders do not want to deal with. So if you want to use sweat equity with a standard mortgage program, the answer is most likely “no” and you need to use cash or down payment assistance grant.
Review How Down Payment Assistance Programs Work
There are, however, a small number of programs that do allow you to use sweat equity for your down payment including the following:
Home Possible Mortgage Program. The Home Possible Program enables you to buy a home with a down payment of only 3% and use non-traditional income sources to qualify for a mortgage. Home Possible applicants can use sweat equity to pay for their entire down payment and closing costs.
Review our Home Possible Mortgage Guide
HomeReady Mortgage Program. The HomeReady Program enables you to use sweaty equity for part of your down payment to buy a home. HomeReady applicants can use sweat equity for 2% of their down payment and are required to make a minimum personal contribution of 3% toward the down payment from their own funds. The minimum required down payment if you use sweat equity is 5% as compared to 3% if you do not use sweat equity.
Review our HomeReady Mortgage Guide
The Home Possible and HomeReady programs are offered by participating lenders. We recommend that you contact multiple lenders in the table below to understand if they offer the programs and to learn more about eligibility requirements. In some cases, you may be required to work with a lender approved by, and apply for the program in conjunction with, a non-profit organization such as a local housing agency.
Habitat for Humanity. Program participants can use their own sweat equity or the contributions of volunteers to pay for the down payment on a home. The Habitat for Humanity program helps make home ownership possible for people with low incomes or limited funds.
Visit Habitat for Humanity to learn more about the programs they offer
The HUD Self-Help Homeownership Opportunity Program (SHOP). The Department of Housing and Urban Development’s (HUD) SHOP Program enables low income home buyers to use sweat equity to pay for the down payment on a home. Program participants are required to contribute at least 100 hours of sweat equity for a family of two or more and 50 hours of sweat equity for an individual home buyer.
Prospective home buyers do not apply for the program through HUD but rather through local non-profit housing organizations that receive SHOP grants from HUD. For example, Habitat for Humanity has received approximately 50% of SHOP grant funds in recent years.
To learn more visit the SHOP Program website
FHA 203(k) Mortgage Program. The FHA 203(k) Program enables you to finance the purchase of a home plus the cost of significant repairs or renovations with a single mortgage. The FHA 203(k) Program requires a down payment of only 3.5% and permits a limited amount of sweat equity.
Review our FHA 203(k) Guide
You can use the FREEandCLEAR Lender Directory to find lenders in your state that offer the FHA 203(k) Program
CHOICERenovation Mortgage Program. This is another fixer upper mortgage program that, when combined with the Home Possible program, allows you to use sweat equity to pay for your down payment and closing costs. The CHOICERenovation Program requires a down payment of only 3% and sweat equity can be used for certain property repairs and renovations.
Review our CHOICERenovation Mortgage Guide
What qualifies as sweat equity for your down payment?
It is important to understand how sweat equity is defined and calculated before you apply for your mortgage. The type of work that qualifies as sweat equity may vary by program but generally includes any structural, carpentry, plumbing, electrical, landscaping, cosmetic or other property repair work.
For the Home Possible and CHOICERenovation mortgage programs, the sweat equity work must be outlined in both the property purchase contract and the appraisal report. Additionally, the appraiser is required to review the completed property improvements to confirm their value.
It is also important to highlight that according to Home Possible guidelines, any work you have put into the property before the property is inspected by the appraiser does not count as sweat equity. For example, if you want to buy a property you are renting, any improvements you made to the property as a renter before the appraisal is performed do not qualify as sweat equity.
To calculate the value of sweat equity labor -- or the work you put into the property improvements -- most programs use the estimate provided by the appraiser or a cost-estimating service. To calculate the value of materials used, programs typically use receipts provided by the home buyer or the estimated material value according to the appraiser or a cost-estimating service.
Because using sweat equity for a down payment involves extra documentation and work by the appraiser it can be very helpful to work with a lender or organization that has experience with this type of mortgage program.
Can anyone contribute sweat equity for a down payment?
The answer to this question also varies by program. For the Home Possible Program, the sweat equity must be performed in a “skillful manner” that is verified by the appraiser. For the FHA 203(k) Program, sweat equity work must be completed by a qualified contractor. The Habitat for Humanity and SHOP programs do not limit who can contribute sweat equity and permit contributions from both the home buyer and volunteers.
As outlined above, using sweat equity for a down payment to buy a home involves additional effort and planning but putting in some extra work and a lot of sweat can make owning a home achievable for more people.
"Expands Home Possible Sweat Equity Parameters." Press Release. Freddie Mac, November 19 2018. Web.
"HomeReady Mortgage Product Matrix." Mortgage Products. Fannie Mae, December 7 2019. Web.
"Self-Help Homeownership Opportunity Program (SHOP)." HUD Exchange. U.S. Department of Housing and Urban Development, 2019. Web.
"203(K) Rehab Mortgage Insurance." Federal Housing Administration. U.S. Department of Housing and Urban Development, 2020. Web.