Sweat Equity
Sweat equity is a term that refers to the value of the physical work a homeowner puts into their property. This could be anything from painting walls to building a deck. Usually, when someone buys a home, they pay for it in part with money for the down payment and cover other costs like closing fees and reserves (money set aside for future needs). However, sweat equity is different. It’s not about paying with money but with labor.
The main point to understand about sweat equity in the context of getting a mortgage through Fannie Mae is that it’s typically not allowed to count towards the down payment, closing costs, or reserves. The reason for this is simple: it’s hard to put a precise dollar value on how much this work is worth.
That said, there are exceptions. Fannie Mae does allow sweat equity to be considered as part of the funds needed to buy a home, but only for certain types of transactions and when specific rules are followed. For instance, if someone is skilled in carpentry and decides to put in kitchen cabinets themselves in the home they are buying, the value of this work could potentially be counted towards their investment in the home. But, to be clear, this isn’t automatically allowed for every home purchase.
For those interested in using sweat equity in this way, they’ll need to look into the HomeReady Mortgage program. This program has its own set of guidelines that detail when and how sweat equity can be used. These guidelines outline the specific situations where sweat equity is considered an acceptable source of funds and what requirements must be met for it to be applied towards the purchase of a home.
It’s important for both lenders and borrowers to familiarize themselves with these rules to ensure that sweat equity is being used appropriately in a mortgage transaction. Failure to adhere to these guidelines could result in complications or delays in the home buying process.
References
For more details, visit Sweat Equity of the Fannie Mae Selling Guide.