Freddie Mac has long allowed certain borrowers to use “sweat equity” to cover a portion of their down payment, but now, the government-sponsored enterprise will allow borrowers to use “sweat equity” to cover their entire down payment.

The GSE announced Monday that it is expanding sweat equity parameters of its Home Possible mortgage. Under the expansion, certain borrowers will be able to “sweat equity,” materials provided or labor completed by a borrower to improve a house before closing on the property, as their full down payment.

“The Home Possible sweat equity offering supports the renovation of aging homes and provides borrowers with an additional form of down payment instead of cash, particularly in rural areas,” Freddie Mac said Monday. “Borrowers can use sweat equity with no limits on the amount that can be applied to the down payment, provided the labor performed is completed in a skillful manner to support the appraised value—and is certified by an appraiser.”

Through the sweat equity program, borrowers can use their construction skills, instead of cash, to cover a portion of down payment and closing costs. According to Freddie Mac, the value of the labor they provide and the money they spend on materials to renovate the home is considered to be equal to personal funds.

Under the program, there is no limit to the amount of sweat equity that a borrower can use to contribute to their down payment and closing costs. Borrowers can use sweat equity to cover as little as 3% of the value of the home in question or much more than that if they complete a major renovation.

According to Freddie Mac, the enhanced sweat equity program has multiple benefits, including supporting and promoting the renovation needs of aging homes, providing an additional source of down payment, and allowing homebuyers who “who work with their hands to make their down payment with their construction skills instead of cash.”

As part of the program, Freddie Mac helps provide borrowers with education, resources and training necessary to understand the program’s rules, partnering with the Federation of Appalachian Housing Enterprises, Hope Enterprise Corporation, Homeownership Education Resources Organization, Enterprise Community Partners, Community Development Corporation of Brownsville, Next Steps, and NextJob.

Through these collaborations, Freddie Mac is providing technical-assistance and training to help increase their capacity to offer homebuyer education, housing counseling, employment and re-employment services and related resources to families in Middle Appalachia, the Lower Mississippi Delta, the Colonias and Native Americans in Indian reservation areas. 

“More than 61 million Americans live, work and raise families in rural areas and other historically underserved communities,” said Mike Dawson, vice president of Single-Family Affordable Lending Strategy and Policy at Freddie Mac.

“In rural America, many creditworthy families with low-to-moderate incomes face significant barriers to homeownership, especially obtaining the down payment,” Dawson added. “This offering will help them use their own construction skills to make up that difference, increasing the pool of mortgage-ready consumers.”

Here’s more on how the program works, from Freddie Mac:

  • Sweat equity to be used for the entire amount of down payment and closing costs with maximum 97% LTV/105% total LTV (affordable seconds).
  • Sweat equity for manufactured homes up to a maximum LTV ratio of 95%.
  • Sweat equity as an eligible source of funds for:
    • All repairs and improvements to be completed by the borrower that are listed in the sales contract and included in the appraisal report.
    • Repairs or improvements that are reflected on the appraisal report that are outstanding at the time of the appraisal.
    • Credit for work completed prior to the original property inspection by the appraiser is not eligible for sweat equity.

“Lenders and borrowers in rural markets in high-needs areas face specific challenges,” Nick Mitchell-Bennett, executive director, Community Development Corporation of Brownsville, said. “The enhancements Freddie Mac is making to its sweat equity parameters are welcome and demonstrate the organization’s efforts to address these specific challenges.”