People Are Now Crowdfunding Down Payments On Their Homes
There might be some downsides, though.
When it comes time to buy a home, many first-time buyers struggle to come up with enough money to make a down payment. Historically, buyers have been encouraged to put down around 20 percent of their home’s cost — a figure that can prove unrealistic for many first-time buyers in today’s market.
These days, people are turning to the same tools they use to raise money for medical bills in the event of an emergency, or to get their business of the ground in order to come up with the significant cash needed to make a hefty down payment: crowdfunding sites.
That’s right. In addition to a Kickstarter campaign for your cousin’s genius app idea and a GoFundMe to help your friend take the trip of a lifetime, get ready for your social media feeds to be filled with links to people’s HomeFundMe pages, a service launched by lender CMG Financial last year that allows users to solicit donations from friends and family for a down payment on a home via an online profile.
“This allows you to tell your story,” Christopher George, CEO of CMG Financial and vice chairman of the Mortgage Bankers Association, told CNBC last year of his company’s tool. “Our tag line is, ‘Fund your way home.’ We think home ownership still is very sensible, and done correctly, is a good idea to step forward toward wealth, stability and quality of life.”
There are no transaction fees on HomeFundMe, and if someone chooses to donate to a campaign, their donation is simply a gift and offers no return on their investment. Donors can also make their gift conditional, so that if the buyers don’t actually go through with the purchase, they won’t receive the donation. Users have one year from their first donation to make a purchase. If they haven’t hit their goal by that deadline, a “Fundraising Coach” will assess their situation to see how viable it is.
As an added bonus, would-be homeowners can attend free credit education courses and counseling to receive grants of up to $2,500 in exchange for completing the classes, after which point the platform will also match donations at $2 for every $1 raised, up to $2,500.
However, the service does come with some major caveats. HomeFundMe users must get a mortgage from CMG Financial, “which can be any Fannie- or Freddie-approved loan, including 30-, 20- and 15-year fixed loans,” according to Market Watch. Borrowers do get to review the mortgage, but their rates could change between pre-qualification and purchase.
Since its launch last year, about 400 borrowers have used HomeFundMe to raise an average of $2,500 toward their down payments. From there, people often combine the money raised with funds they have saved themselves, so the donations ease the financial burden only in part. For those who rely on the generosity of others to fund their down payment in full, some experts in the real estate industry worry that it’s a sign that they’re not truly financially prepared for home ownership.
“I have qualms with anybody getting a loan who can’t put some down payment down themselves,” Rick Sharga, executive vice president at Ten-X, an online real estate sales and auction company, told CNBC. “Those types of borrowers typically are one water heater away from missing their payments, going into default, maybe losing the house to foreclosure.”
If a borrower can’t quite swing 20 percent for a down payment, there are other alternatives to help make them homeowners. FHA loans require a minimum of 3.5 percent down, and for those who served in the military, VA loans offer mortgages that require no down payment.
Would you consider crowdfunding to a secure a down payment on a home?
[H/t Wall Street Journal]