Saving for a down payment is often the one obstacle that keeps potential buyers from purchasing a home. Saving that illustrious 20% can seem impossible, especially in the face of rising rents and a higher cost of living. The good news is that you don’t necessarily need 20% down on a home to get financing. The even better news is that you may be able to use crowdfunding to get your down payment.
Before you do, though, there are some things you should know that lenders require when it comes to crowdfunding a down payment.
You Might Have to Use a Specific Lender
Fannie Mae and Freddie Mac, the two mortgage giants that back most conventional loans, approve of down payment crowdfunding, but only through certain lenders. If you want to use crowdfunding, you may have to use these lenders. This may or may not work to your advantage depending on your qualifying factors and what they charge.
We always recommend looking around at all of your options. Even if you think you can crowdfund the down payment, look at options that require smaller down payments, or none at all. USDA and VA loans are both options that don’t require a down payment. You may even find conventional lenders that charge less for the loan, even if you only have the minimum 5% down payment.
It Takes Time to Crowdfund
We don’t recommend trying to buy a home in a short amount of time if you need to crowdfund the down payment. When you start a crowdfunding campaign, it usually has to sit for a few months for people to contribute to it. In fact, the main crowdfunding program through CMG Financial gives you a total of 12 months to get the total amount you need.
That 12-month mark should also be something that you note. If you can’t get the amount of money that you need in 12 months, you’ll have to figure out what to do. In some cases, you may qualify for an extension of the program. If you don’t, you will receive the money with the freedom to do what you want with it, but obviously, people gave it to you to buy a home so that should be the end result at some point.
You May Have to Pay Taxes
Gift funds beyond a certain point become taxable income. For the year 2018, you can receive up to $15,000 without having to pay taxes. After that point, though, you will need to claim the income on your tax returns, which means it could increase your tax liability.
If you think you want to use the crowdfunding platform, make sure that you talk to your tax advisor first. You should know how it could affect your tax liability so that you aren’t left with an unpleasant surprise come tax time next year.
You Shouldn’t Rely on Crowdfunding 100%
If you don’t have any money set aside for a down payment, it might not be the right time for you to buy a home. While crowdfunding can be a great resource to get the funds you need, it may not provide the entire down payment. In fact, lenders like it if you have some of your own money invested in the home. It lowers the risk of default. If you don’t have your own money invested, you become a higher risk of default. What stops you from just walking away from the home if you can’t afford the payments?
Lenders each have their own minimum requirement that they want you to invest from your own money. Sometimes it’s just a small amount and other times they want as much as 50% of the down payment to be your own funds. It depends on your other qualifying factors and how high of a risk of a default lenders think you pose.
It Can Help you Avoid Mortgage Insurance
Depending on your situation, getting crowdfunding may be able to help you avoid mortgage insurance. The only way to do this is to take out a conventional loan and make a 20% down payment. If you have some money to put down, but not quite 20%, crowdfunding can help you get to that point so that you save on the mortgage insurance.
If you can avoid mortgage insurance for the life of your loan, you could save yourself thousands of dollars. PMI costs are different for every borrower, but it can cost as much as $100 or more per month. If you have to pay that fee for many years, it really adds up to a lot of money!
Crowdfunding your down payment is definitely one of the newest ways to get the money you need to put down on a home. If you think you want to give it a try because you have a large network of people that will likely contribute, talk with your lender and tax advisor first. Make sure that you won’t put yourself in a dire financial situation by doing so. If it all looks good, though, crowdfunding can be a great way to get the down payment that you need.