Most mortgage programs do not permit the use of sweat equity. Instead, you are required to make a down payment with your personal funds, a gift or a down payment assistance program to qualify for the mortgage.
There are, however, a small number of programs that allow you to use sweat equity to qualify for a mortgage. With these programs, repairs, renovations or upgrades you make to the property with your own labor and resources increase the value of the property and enable you to qualify for a mortgage to buy the home.
For example, if you want to buy a home for $97,000 and you do not have sufficient funds for the required 3% down payment, you could contribute $3,000 in sweat equity to qualify for the mortgage. In his case, the value of the home after your sweat equity improvements is $100,000 but you still only need $97,000 to buy the home. Your sweat equity contribution enables you to meet the down payment required to be eligible for the mortgage program.
Lenders apply relatively strict guidelines for what type of work qualifies as sweat equity and how and when the work must be performed. In most cases, work that you put into a property before you agreed to purchase it, including if you made improvements or repairs to a property you are renting, is not included as sweat equity when you apply for the mortgage.
Only new renovations or property improvements that you intend to make as outlined in the property purchase contract and appraisal report count toward your sweat equity contribution. Additionally, the appraiser or a home inspector is usually required to verify the value of the completed renovations so that they are reflected in the revised, higher property value used for your mortgage application.
For example, if you agreed to contribute $3,000 in sweat equity, the lender requires a third party to confirm that the value of the work you performed increased the property value by at least $3,000. If the work is incomplete or done with low quality materials or craftsmanship, the sweat equity contribution may not be permitted by the lender.
This is why if you want to use sweat equity to qualify for a mortgage, any property improvements must be completed in a high-quality manner. You are also required to provide receipts, invoices and other documents to confirm the value of both your labor contribution and the materials used to perform the work. To use sweat equity, some programs require all work to be done by a qualified licensed contractor while others permit non-contractor homebuyers and even volunteers to contribute sweat equity.
Sweat equity can encompass a wide range of property improvements including additions, structural shoring, HVAC, plumbing, electrical wiring, energy efficiency and exterior upgrades or renovations. We recommend that you determine the work that qualifies as sweat equity and the documentation you are required to provide before you apply for the mortgage.
Because of the extra time and effort involved, only a small number of lenders and mortgage programs enable you to use sweat equity to buy a home. We outlined these loan programs below:
Home Possible Mortgage Program. The Home Possible Program enables you to qualify for a mortgage down payment of only 3%. Home Possible borrowers can use sweat equity to pay for their down payment and closing costs, which can run thousands of dollars depending on your mortgage amount and other factors.
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. Please note that applicants that use sweat equity are required to make a minimum personal contribution of 3% toward the down payment from their own funds.
Review our HomeReady Guide
You apply for the Home Possible and HomeReady mortgage programs with traditional lenders including banks, mortgage brokers and credit unions. We recommend that you contact multiple lenders below to determine if they offer the programs and to learn more about qualification guidelines.
FHA 203(k) Mortgage Program. The FHA 203(k) Program enables you to qualify for a single mortgage that is used to buy a home and pay for significant property renovations. 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) Mortgage Guide
The Program uses the after renovation property value to determine your loan-to-value (LTV) ratio, which enables you to qualify for a higher mortgage amount. Additionally you can qualify for the program with a credit score of only 580 and a score of only 500 if you make a down payment of at least 10% of the property purchase price, including your sweat equity.
The downside of the FHA 203(k) Mortgage Program is that you are required to pay an upfront and ongoing FHA mortgage insurance premium (MIP), which is an additional closing cost and monthly fee.
FHA 203(k) mortgages are provided by approved lenders. The table below shows FHA mortgage rates and fees, including the upfront MIP, for leading lenders. We advise you to contact multiple lenders about program availability.
You can also use the FREEandCLEAR Lender Directory to search by lender type, location and mortgage program. For example, you can search for top-rated lenders in your state that offer the Home Possible and FHA 203(k) loan programs.
HUD Self-Help Homeownership Opportunity Program (SHOP). The Department of Housing and Urban Development’s (HUD) SHOP Program enables low income applicants to use sweat equity to qualify for a mortgage on a home. Borrowers 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 applicant.
You apply for the SHOP homebuyer program through local non-profit housing organizations that receive grants from HUD. For example, Habitat for Humanity has received approximately 50% of SHOP grant funds in recent years.
Visit the SHOP website to learn more about the program
Habitat for Humanity. This program enables you to use your own sweat equity or volunteer contributions to pay for the down payment when you buy a home. The Habitat for Humanity program makes buying a home achievable for people with low-to-moderate incomes or limited financial resources.
Visit Habitat for Humanity to learn more about the programs they offer.
In summary, using sweat equity to qualify for a mortgage requires additional time and effort but can help people with limited funds to buy a home. The first step is to find a lender and mortgage program that allows sweat equity and then determine how you can use your hard work and ability to qualify.
"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.
"203(K) Rehab Mortgage Insurance." Federal Housing Administration. U.S. Department of Housing and Urban Development, 2020. Web.
"Self-Help Homeownership Opportunity Program (SHOP)." HUD Exchange. U.S. Department of Housing and Urban Development, 2019. Web.
"What is sweat equity?" Stories. Habitat for Humanity, 2019. Web.