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Fixer Upper Mortgage Program That Allows Sweat Equity

What fixer upper mortgage programs allow sweat equity?

Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience
, Trusted Mortgage Expert with 45+ Years of Experience

Fixer upper mortgage programs offer multiple benefits including the ability to purchase a home or refinance your loan and include the cost of significant home renovations with a single mortgage. Using one mortgage to finance home improvements instead of two loans -- a construction loan plus a permanent mortgage -- can save you both money and time.

Another benefit of a fixer upper mortgage as compared to a standard loan program is that your maximum mortgage amount is calculated based on the after renovation property value. This is important because using the post renovation property value enables you to qualify for a higher mortgage amount.

Fixer upper mortgage programs also apply a higher loan-to-value (LTV) ratio which reduces your required down payment (or homeowners equity if you are refinancing) and increases the loan amount you are eligible for.

For example, if a fixer upper program permits an LTV ratio of 97% and you want to buy a home for $100,000 and finance $50,000 of property renovations, the maximum mortgage amount you can qualify for is $145,500 ($150,000 post-renovation property value * 97% LTV ratio = $145,500).

In comparison, with a standard mortgage program that uses a 80% LTV ratio based on the pre-renovation property value, your maximum loan amount is $80,000 ($100,000 pre-renovation property value * 80% LTV ratio = $80,000).

Several fixer upper mortgage programs also enable you to use sweat equity, which is defined as your personal labor or the materials you provide to renovate a property, to contribute to the required down payment or closing costs. This reduces the amount of funds you are required to personally put down to qualify for the loan.

Returning to the example above, if you buy a home for $100,000, finance $50,000 in property improvements and are eligible for a $145,500 mortgage, the required down payment is $4,500. You are also required to pay closing costs that can run thousands of dollars.

Instead of paying for these costs with funds from your bank account, you may be able to use your sweat equity which can make it more financially feasible to buy the home. If you possess the skill set and qualifications to perform home improvements valued at the required down payment, you may be able to qualify for the mortgage with no personal financial contribution.

For example, if you are required to make a $4,500 down payment to buy a home and can personally make home repairs or provide materials valued at $4,500, then you can use your sweat equity to satisfy the down payment requirement.

Below we summarize multiple fixer upper mortgage programs that permit you to use sweat equity. Each program has different guidelines so continue reading to determine the financing option that best meets your needs.

CHOICERenovation Mortgage Program. When combined with the Home Possible program, the CHOICERenovation Program enables you to use sweat equity to pay for your down payment and closing costs. Sweat equity can be used to pay for repairs or renovations that are outlined in the property sales contract or appraisal report.

According to program guidelines, any sweat equity labor must be done in a skillful manner and approved or certified by an appraiser. Additionally, the cost of any materials used must be provided by an independent appraiser or cost estimating service or be documented with receipts.

The CHOICERenovation Program allows a maximum LTV ratio of 97% for a single family residence and can also be used for multifamily properties with up to four units, although a lower LTV ratio applies. You are required to pay PMI if your LTV ratio at closing is greater than 80% but the PMI is cancellable when your LTV ratio falls below a specified level -- usually 78% to 80%.

CHOICERenovation mortgages are provided by traditional lenders such as banks, mortgage brokers and credit unions. We recommend that you contact multiple lenders in the table below to determine program availability and to find the best loan terms.

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Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. Click for more information on rates and product details.

FHA 203(k) Program. Sweat equity can be used to fulfill the down payment requirement for an FHA 203(k) mortgage. For this program, sweat equity is defined as labor or renovation materials provided by the applicant. Please note that you cannot receive any payment for the labor you personally provide.

The lender is required to verify the market value of any labor or materials provided according to an appraiser or cost estimating service. The lender is also required to confirm that all sweat equity work is done in a “satisfactory” manner. In some cases, the property renovations must be performed by a certified contractor so you should clarify this point with your lender.

The FHA 203(k) program allows a maximum LTV ratio of 96.5% for a home purchase and 97.75% for a refinance. The program requires your to pay an upfront and monthly FHA mortgage insurance premium (MIP) which is an extra closing cost and ongoing expense. In most cases you are required to pay MIP for the entirety of you mortgage, regardless of your LTV ratio.

The good news is the FHA mortgage rates tend to be lower than conventional rates. The table below shows leading FHA lenders in your area. We recommend that you shop several lenders to find the lowest rate and fees.

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Current FHA Mortgage Rates as of November 15, 2019
  • Lender
  • APR
  • Loan Type
  • Rate
  • Payment
  • Fees
  • Contact
View All Lenders

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Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. Click for more information on rates and product details.

HomeStyle Renovation Program. While this program does not technically permit sweat equity, you can use “Do-It-Yourself” work to finance up to 10% of the after renovation property value. According to program guidelines, “Do-It-Yourself” work is defined as the cost of materials or contracted labor.

This means you can finance the cost of building supplies you personally purchase as well as the cost of contractors or other home improvement professionals you hire to do renovations. Because sweat equity is not allowed; however, you do not receive any credit toward your down payment or closing costs and cannot be reimbursed for any labor you personally provide to renovate the property.

The HomeStyle Renovation Program permits an LTV ratio of 97% for a single unit, owner occupied property financed with a fixed rate mortgage. Similar to the CHOICERenovation Program, you are required to pay monthly PMI if your LTV ratio is greater than 80%.

You can use the FREEandCLEAR Lender Directory to search over 3,900 lenders by location and loan program. For example, you can find top-rated lenders in your state that offer the HomeStyle Renovation Program.

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Sources

CHOICERenovation Guidelines: https://sf.freddiemac.com/working-with-us/origination-underwriting/mortgage-products/choicerenovation

Home Possible Sweat Equity Guidelines: https://sf.freddiemac.com/working-with-us/affordable-lending/duty-to-serve/rural-housing/sweat-equity-overview

FHA 203(k) Sweat Equity Guidelines: https://www.hud.gov/sites/dfiles/OCHCO/documents/4000.1hsgh_20191024.pdf

HomeStyle Renovation Do-It-Yourself Guidelines: https://www.fanniemae.com/content/fact_sheet/homestyle-renovation-product-matrix.pdf

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About the author

Harry Jensen, Mortgage Expert

Harry is the co-founder of FREEandCLEAR. He is a mortgage expert with over 45 years of industry experience. Over his career, Harry has closed thousands of loans for satisfied borrowers and now offers his advice and insights on FREEandCLEAR.  Harry is a licensed mortgage professional (NMLS #236752). More about Harry

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