For many Americans, saving enough for a down payment seems like a practically insurmountable hurdle. One lender claims to have found a solution to this problem. Privately-held mortgage banking firm CMG Financial has launched HomeFundMe — a pilot crowdfunding service that’s the first to receive approval from Fannie Mae and Freddie Mac.
To facilitate the crowdfunding process, HomeFundMe received approval from Fannie Mae and Freddie Mac for borrowers to accept money from a wider array of potential donors.
If home buyers use HomeFundMe, they can collect the money for a down payment and will receive a mortgage from CMG Financial. There’s no fee to use the service, although home buyers do obviously have to get pre-qualified for a loan.
How does it work?
Each donor to HomeFundMe campaigns can give gifts up to $7,500. For people who earn less than their area’s median income, HomeFundMe will match two dollars for every dollar raised up to $2,500 or 1% of the home’s purchase price. Those who make more than their area’s median income will get match funds up to $1,000. The service has been in beta testing for about a month. CMG requires HomeFundMe’s users to go through housing counseling from an independent agency and will cover any related fees.
Critically, borrowers won’t have the same ability to shop around for the lowest rate or cheapest fees as they would otherwise if they choose to go this route. And that can make a big difference to a home’s affordability.
In one pricing scenario CMG provided, a 30-year fixed-rate loan for a $300,000 home in Murfreesboro, Tenn., with 5% down would have an APR of 4.2409% for a monthly mortgage payment of $1,381.25.
All else being equal, that home buyer could also theoretically get a loan with just 3.663% APR from Home Point Financial, for a monthly payment of $1,280 or roughly $100 in monthly savings — or $36,000 over 30 years, according to rates available on comparison site Lendingtree.
Do other companies offer crowdfunding for down payments?
Examples abound on popular crowdfunding platform GoFundMe.
Real estate-specific crowdfunding platforms also exist — Feather the Nest, an online real-estate gift registry, allows users to collect money to form a down payment.
These crowdfunding platforms also often come with fees. GoFundMe and Feather the Nest both take a 5% cut on personal campaigns, in addition to a payment processing fee of 2.9% plus 30 cents per donation.
Donating to a down payment fund has also become a common alternative to the traditional wedding registry. Down payments is the second most popular category on Honeyfund, an online wedding registry that allows guests to give cash rather than gifts, said Sara Margulis, the site’s chief executive officer and co-founder.
Annually, roughly $2 million is raised for down payment funds through Honeyfund.
Do other crowdfunding sites have restrictions?
Crowdfunding through sites like GoFundMe or Honeyfund do have their own drawbacks. Funds collected through a site like GoFundMe or Honeyfund are considered gifts. They are subject to certain requirements for Fannie Mae-, Freddie Mac- and the Federal Housing Administration-approved loans. Typically only family and close friends are allowed to contribute to a downpayment with these agencies. Borrowers are also required to document the source of funds received as gifts.
Because of its special approval from Fannie and Freddie, however, HomeFundMe’s platform can process the required documentation. CMG’s platform can also accept donations from a wider range of people than would typically be allowed for down-payment gifts.
Donors who choose to give funds to someone through HomeFundMe can also elect to make the donation conditional on them actually going through with the home purchase.
What’s more, CMG will assign a fundraising coach to help them design their crowdfunding campaign. In one case during the beta testing, the coach helped someone who didn’t have social media to come up with an offline approach to spreading the word: The person distributed flyers at their church and successfully raised the funds.
Why do people need help with their downpayments?
HomeFundMe is one of many new efforts to address the burden of saving for a down payment.
Some good news: First-time home buyers currently face lower down payments — at least, as a percentage of the overall house price. The 20% down payment — long the standard — is now a thing of the past. Today, first-time home buyers only put 7.2% down on average when making a home purchase. Repeat home buyers only make a 14.5% down payment on average.
Data has shown that people who fund their down payments using gifts are less likely to fall into foreclosure.