Would be home buyers who can’t afford to save for a down payment are increasingly looking at crowdfunding options to fund their home purchases.
What’s more, traditional lenders are helping to pave the way. For example the mortgage lender CMG Financial recently launched an online platform called HomeFundMe for borrowers to attempt to crowdfund their down payments without any fees. The platform is also being backed by mortgage financing giants Fannie Mae and Freddie Mac, no less.
Crowdfunding is proving to be a popular avenue for funding because down payments remain one of the biggest obstacles for first time home buyers. Many are unable to save up due to the burden of student loan debts, expensive rents and unemployment.
Traditional alternatives to saving include down payment assistance from family members and employers, but for these financial gifts lenders generally want to see a ton of documentation to ensure the money is indeed a gift and not a loan.
With CMG Financial’s new crowdfunding platform, any money raised is also considered a “gift”, which means there’s no return on investment for the investors themselves. As such, Christopher George, CEO of CMG Financial and vice chairman of the Mortgage Bankers Association, says many of these gifts will be pretty small, in the region of $50 to $250.
“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 tax deductibility,” George told CNBC.
CMG Financial said that alongside the crowdfunding platform it’s also offering up to $2,500 in additional funds for homeowners who attend free credit education courses and counseling. The lender will also match donations on the crowdfunding platform with $2 for every $1 raised, up to a maximum of $2,500.
“What we’re doing today is we’re trying to test and learn a variety of solutions because the preferences for today’s home buyers 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 of 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.”
However, some industry experts say they’re concerned about prospective home buyers using crowdfunding platforms and other gifts to fund their entire down payment.
“I have qualms with anybody getting a loan who can’t put some down payment down themselves,” said Rick Sharga, executive vice president at Ten-X, an online real estate sales and auction company. “Those types of borrowers typically are one water heater away from missing their payments, going into default, maybe losing the house to foreclosure.”
Even so, Sharga told CNBC he isn’t entirely against using crowdfunding for down payments.
“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.”
In other words, crowdfunding platforms such as CMG Financial’s biggest potential lies in being used in combination with buyer’s own savings to raise a down payment.