One of the main hurdles to getting a mortgage—aside from improving your credit history and score—is saving enough money to cover your down payment.
More than one in ten buyers believes that saving for a down payment is the most difficult step in the home buying process, according to the National Association of Realtors 2020 Home Buyer and Seller Generational Trends Report. This is especially true for buyers who are age 29 and younger, of whom 30% report having the most trouble coming up with down payment funds.
Another report says that the top concern among millennial home buyers is having enough money for a down payment. Half of respondents in a recent Redfin survey of 24- to 38-year-olds cited that as their primary obstacle.
Sometimes, the more traditional ways to save for a down payment, such as saving aggressively or borrowing from a retirement account, may not get you to the amount needed to purchase your home. One alternative is to tap platforms similar to GoFundMe and Kickstarter, which allow you to raise money to meet your goal. Here's why you should consider crowdfunding your mortgage.
- Crowdfunding is best known as a way for entrepreneurs to fund their businesses, but it can also help aspiring homeowners raise the funds to buy a home.
- Platforms like HomeFundIt and Feather the Nest are dedicated to helping home buyers crowdfund a down payment.
- HomeFundIt offers a home buyer education course and donation matching, and it charges no fees; however, users must use CMG Financial for their home purchase.
- Crowdfunding your mortgage down payment may help you get a lower interest rate and avoid paying for mortgage insurance.
Should You Crowdfund Your Down Payment?
Crowdfunding is traditionally defined as using small amounts of capital from a large group of individual contributors to finance a new venture. Aspiring entrepreneurs who are looking to secure funding for their business, or nonprofit organizations that need to raise funds for an upcoming initiative, might find that a crowdfunding website can help them reach their goals. This same concept can be applied to personal endeavors, including home ownership.
HomeFundIt, from mortgage banking firm CMG Financial, is described as "the first industry-approved crowdfunding service providing home buyers the support, education, and platform they need to crowdfund a mortgage down payment," according to a press release announcing its launch.
How Crowdfunding Your Down Payment Works
Once a user creates a HomeFundIt account, they are directed to complete an online application for mortgage prequalification. If all goes well, they'll be able to build a campaign, promote it, and begin crowdfunding their down payment.
Home buyers who use HomeFundIt are also encouraged to complete a homebuyer education course—for which fees will be covered. For buyers who earn less than their local average median income, HomeFundIt matches $2 for every $1 crowdfunded, up to $2,500 or 1% of the purchase price, whichever is lower. Buyers who earn more than the average median income can receive $2 for every $1 crowdfunded up to the lesser of $1,000 or 1% of the purchase price.
A few caveats to HomeFundIt: Users must borrow with CMG Financial for their home purchase, and they only have 12 months to close on a home after receiving their first contribution.
Unlike most crowdfunding platforms, HomeFundIt doesn't charge fees to its users. All contributed funds go directly to the home buyer's down payment unless any of the contributors designate their portion of the money as non-conditional to the home purchase.
Another crowdfunding service dedicated to helping potential home buyers is Feather the Nest. Users register on the site, build a "nest," and share it with their social network to garner support. Money is transferred to nest owners within 10 minutes of each contribution made toward their goal amount. Aside from down payments, site users can also raise funds for a home renovation or other real estate-related initiatives. There is a transaction fee of 5% for every contribution, however.
Why Your Down Payment Amount Matters
Your down payment is crucial to your home purchase, and the more you're able to contribute, the better you'll start off as a homeowner. You're likely to receive a more competitive mortgage interest rate and—if you save and crowdfund enough for a 20% down payment—avoid the need for mortgage insurance.
In addition to implementing tactics like automating savings and crowdfunding, consider stashing away any windfalls, such as a bonus or a tax refund, to help boost your down payment amount.
Starting your homeownership journey with a decent amount of equity should feel like a noteworthy accomplishment.