The majority of millennials today may say they want to be homeowners, but that claim nearly always comes with the caveat…if I can afford the down payment. High levels of student loan debt, high rent and underemployment during the recession have left the largest generation with little savings and diminished hopes of home ownership.
“This allows you to tell your story. It allows for folks to be able to buy into the story of what it is you have, your loan story, your home story,” said Christopher George, CEO of CMG Financial and vice chairman of the Mortgage Bankers Association. “Our tag line is, ‘Fund your way home.’ We think homeownership still is very sensible and, done correctly, is a good idea to step forward toward wealth, stability and quality of life.”
Until now, borrowers could receive down-payment assistance from their close family members, employers, community nonprofits and their churches, all with significant documentation. This was so lenders could be sure they weren’t borrowing the down payment, adding debt on top of the mortgage. Lenders also wanted to be sure borrowers were able to make the monthly mortgage payments.
Most business crowdfunding platforms offer returns on the investment, but this has none — it is simply a gift. George said the individual gifts will be small, in the $50 to $250 range. The platform can be linked to wedding and baby registries.
“You’re going to spend $250 on a coffee making machine? If that $250 goes to a down payment of your home, at the very least, I improve your quality of life and the second thing I do is I give you some, today, some tax deductibility,” George added.
As an incentive for encouraging prospective homeowners to attend credit education courses and counseling, borrowers can also receive grants of up to $2,500 once they’ve completed the free classes. After that, the platform will match donations at $2 for every $1 raised, up to $2,500.
“Folks that go to counseling tend to be more informed, and they also tend to be better borrowers,” George said. “We’ve looked at this as advertising dollars and have said, listen we think this promotes homeownership, we think it’s something that we would otherwise spend either through the internet or through social media. We’ve put our money here where we think it has its best use.”
On the other side, contributors are also assured that the money will in fact go to fund the home purchase and can make their gift conditional on that.
The idea is not just to raise money for the down payment but to add to the borrower’s existing funds. This can help eliminate the need for mortgage insurance, which is required on very low down payment loans. Fannie Mae () is calling it a “pilot project,” and will be watching the results closely.
“What we’re doing today is we’re trying to test and learn a variety of solutions because the preferences for today’s homebuyers have changed significantly, and there is no silver bullet to solving a problem that’s as hard as how do you find a down payment,” said Jonathan Lawless at Fannie Mae. “What we prefer to do is source ideas from all sorts of different places. Our customers are a major one, lenders who are dealing every day with people trying to buy homes, and instead of trying to take those ideas and spend three years trying to roll out a major change, we’d rather test and learn.”
Sellers used to be able to assist buyers with the down payment, but that was prohibited following the financial crisis. No-down payment loans are also largely gone since then, except for high net worth individuals in private lender programs not backed by the government.
One of the biggest criticisms of lending during the housing boom and ensuing bust was that homeowners were able to finance their properties so easily, with little to no money up front, so they had no “skin in the game.” They therefore found it much easier to default on the loans when home prices crashed and walk away from the homes altogether.
This program walks a fine line between gift and equity. Some borrowers will add the crowdfunded equity to their own cash while others may not, depending on how much they get.
“Skin in the game is a little bit of a confusing concept. If you pay for your closing costs, is that skin in the game? Is it really down payment?” asked Lawless. “Would you rather have somebody have a lot of money in the bank after they buy the home and no down payment or the opposite? And so we still have a lot of questions and a lot to learn when it comes to the role of down payment.”
Lawless says it is all about savings — helping the homeowner avoid becoming house poor after their purchase. He says that makes the consumer safer than someone who is unable to generate any savings. Others argue that if you can’t save enough for a down payment in the first place, then you probably shouldn’t be buying the house.
“I have qualms with anybody getting a loan who can’t put some down payment down themselves. Those types of borrowers typically are one water heater away from missing their payments, going into default, maybe losing the house to foreclosure,” said Rick Sharga, vice president at Ten-X, an online real estate sales and auction company.
Sharga, a noted analyst during the foreclosure crisis, said that if a borrower can’t fund the down payment alone then he or she is likely not financially ready for the investment. He was not, however, entirely against the crowdfunding platform.
“If crowdfunding is a way to augment a down payment or to make a bigger down payment than you could make yourself, because then it will keep your monthly payments down or it will help you qualify for a loan that you might not have gotten without the crowdfunding, I could see the benefits of that,” he added.