As the popularity of FHA mortgages continues to rise, borrowers are becoming more informed about the various options available for the required down payment. One of these options that many are already implementing is using sweat equity for FHA mortgage down payments. In other words, sweat equity is work that is performed by the borrower and is often used with homes that are in need of repair, such as foreclosures, or for new homes under construction.
FHA guidelines for using sweat equity for down payments are specifically outlined and must be understood. For existing construction, the appraisal is to be done prior to the sweat equity and must list the repairs and/or improvements that are eligible. For proposed construction, all work that will be done by the borrower during the construction period must be indicated on the sales contract.
Documentation for the value of the labor is done through the appraiser’s estimate or a cost estimating service. Work such as clean up, maintenance and debris removal are not considered acceptable as sweat equity for FHA mortgages. Painting, trim work, flooring, drywall, carpentry and landscaping are some of the items that are acceptable for sweat equity. Any funds and materials provided by the borrower must be documented for the source of funds and the value of the materials used.
The borrower must have the ability to perform the work and cannot do something that requires a license or certification which they don’t have, such as electrical. The lender will order a final inspection which is necessary to confirm that the work has been fully completed by the borrower. FHA approved lenders have detailed guidelines for using sweat equity for FHA mortgage down payments which must be followed very closely in order for it to be accepted.
At this time, current FHA 30 year fixed mortgage rates are at 3.750%, FHA 15 year fixed mortgage rates are at 3.500% and FHA 5/1 adjustable mortgage rates are at 2.750%. The required FHA down payment is currently 3.5% for credit scores as low as 580 and 10% for credit scores as low as 500. Using sweat equity as the cash investment for the down payment is another one of FHA mortgage benefits that is not available with other types of mortgage loans. It is just another way that FHA mortgages make it possible for consumers who are short of cash to still become homeowners.
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