Part I of a series on buying a home
In many parts of the county, including central New Jersey, house payments are more affordable than the rising cost of renting. The main barrier for those who would like to buy a home isn’t the monthly mortgage but the down payment. Between stagnant wages, student loans and high rental expenses, many would-be homeowners remain stuck in the rental loop.
One national mortgage lender, CMG Financial, is helping prospective homebuyers finance their real estate purchase through “crowdsourcing.” Their HomeFundMe program invites relatives, friends and followers to donate money toward a down payment. Will this gimmick fall flat? Or could it be the wave of the future?
A very Millennial path to homeownership
Many Millennials have bucked the tradition of “setting down roots” with a marriage and a mortgage. But not necessarily by choice. According to surveys, many who would like to be homeowners cannot get over the financial obstacles. Steep rent and student loan payments prevent them from saving up for a house. Meanwhile, competition for limited housing drives up rental rates for apartments, condos and townhouses, feeding the vicious cycle.
The HomeFundMe programs aim to help first-time homebuyers escape the rental trap. After getting pre-approved for a mortgage loan, prospective homeowners can open their donation drive. They then have 12 months to buy a house.
Family, friends and strangers can donate one of two ways: (1) Conditional funds are returned to the donors if the couple does not purchase a home within a year. (2) Unconditional funds are disbursed to the couple with no strings attached — perhaps for a future down payment, or perhaps for a wild weekend in Vegas!
The program can also be attached to gift registries such as weddings, baby showers and college/grad school graduations. According to CMG, the average wedding has 120 guests and the average spend for a wedding gift is $186. Instead of gravy boats and blenders, why not invite guests to contribute that money toward the down payment on real estate?
Is it legal? Yes. Should you get legal advice? Probably.
Most loan programs allow buyers to raise all or part of the down payment through family or other sources. Lenders don’t really care where you get the money. What they really want is assurance that you will keep up with the ongoing mortgage payments. If you have personal equity in the property, you are less likely to walk away and default on the loan when finances get tight.
Crowdsourcing a down payment could potentially expose you to fraud allegations if your plans fall through or if the money is used for anything other than buying a house or condo. It is always advisable to consult a real estate lawyer when buying a home. An attorney can help in purchase negotiations, in making sure the property and the title are clear of defects, and in troubleshooting anything that arises with the paperwork or the transaction. The Law Offices of Rajeh A. Saadeh handles residential real estate matters in Somerville and surrounding New Jersey.
Next in the series: How much down payment do you really need? You might be surprised.
Source: A new way to buy a home: crowdfunding the down payment (CNBC)