Exclusive to rural-area borrowers, Freddie Mac now allows borrowers to apply the value of sweat equity to account for 100% of their down payments.
How is Sweat Equity’s Capability Changing?
With the recent expansion of the Freddie Mac Home Possible program, mortgage borrowers can use sweat equity instead of cash to cover their entire down payments. Announced last month, this product is positioned to aid borrowers in rural markets. Borrowers going the sweat equity route must apply a minimum of 3% sweat equity, but there is maximum value of sweat equity a borrower can use for down payment or closing costs.
Sweat equity is calculated as the sum of money borrowers spend on materials plus the value of labor performed to renovate a home. The sweat equity expansion to Freddie Mac Home Possible loan program is part of an initiative to renovate and maintain aging homes.
How Can Loan Originators Leverage Sweat Equity?
As a result of the sweat equity expansion to Freddie Mac’s Home Possible program, mortgage loan originators may be able to drive more loan volume, assist borrowers who need new down payment sources, finance incremental mortgages for families with low to moderate incomes in the rural housing market and increase footprints in historically underserved markets.
Mortgage loan originators looking to leverage interest in sweat equity mortgages should consider digital marketing tactics such as:
- Content Marketing. Website content, articles and blogs should focus on promoting sweat equity as a viable option for renovation funding.
- Geotargeting. Since the Home Possible sweat equity is geared toward borrowers in rural areas, originators should use geotargeting to hone marketing to these areas, avoiding media waste in regions that don’t qualify.
- Earned & Paid Social Media. Social media content can highlight the benefits of sweat equity mortgages, drawing people to website content for additional information. Paid social can be targeted based on geography and recent behaviors, which may be an indicator of intent to move.
- Paid Search. Paid search campaigns should be expanded to include keywords related to renovation and sweat equity mortgages. Use dedicated landing pages, highlighting features of renovation and sweat equity loans with creative and copy geared towards rural housing markets.
- Pay-Per-Call. Get a consistent flow of inbound calls with targeted pay-per-call leads. Campaigns can be set up to filter prospects by geography to focus on borrowers rural areas.
How Does Freddie Mac’s Home Possible Sweat Equity Mortgage Compare to Other Home Renovation Loan Programs?
The Freddie Mac Home Possible program allows sweat equity to cover the entire amount of a mortgage down payment and closing costs with maximum 97% loan-to-value (LTV)/105% total LTV (affordable seconds). Sweat equity can be used for all repairs or improvements completed by the borrower and listed in the sales contract and appraisal report, including outstanding repairs at the time of the appraisal and on the appraisal report. Credit for work finished prior to the appraiser property inspection are not be eligible for sweat equity valuation as part of the Home Possible program.
Meanwhile, the Fannie Mae HomeStyle loan allows borrowers to make renovations with their first mortgage. The LTV for HomeStyle is also 97%, however do it yourself (DIY) projects must not expense more than 10% of the borrowed amount, and reimbursements will not include sweat equity.
The FHA’s 203K loan is another option for borrowers planning to complete renovations. Unlike Freddie Mac’s Home Possible program, FHA 203K borrowers need to borrow at least $5,000. The funds can be used for home improvements, but the projects can’t be DIY and must involve hired contractors. Though the FHA 203K offers a low down payment, it’s a highly regulated program and may be the most expensive option for borrowers looking to renovate.
Expanding Your Mortgage Niche in Rural Markets
The sweat equity expansion to the Home Possible loan program is part of Freddie Mac’s larger “Duty to Serve” initiative. “In rural America, many creditworthy families with low to moderate incomes face significant barriers to homeownership, especially obtaining the down payment,” according to Vice President of Single-Family Affordable Lending Strategy and Policy at Freddie Mac, Mike Dawson. The sweat equity expansion will help borrowers use their own construction skills to make up that difference, increasing the pool of mortgage-ready consumers.
More than 60 million Americans reside in rural areas, many of which have been considered historically underserved. Especially if you are already building a business in rural markets, the expanded sweat equity mortgage program could represent a profitable opportunity for growth.
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