No Savings? No Problem. These Companies Are Helping Home Buyers With Down Payments

Liz Osban for The Wall Street Journal

Reese and Kyle Rademacher weren’t sure how they would afford a down payment to buy a home until their real-estate agent mentioned an offbeat idea: crowdfund the money from friends and family.

Mrs. Rademacher, a 28-year-old construction technician, set up an online profile with a program called HomeFundMe to solicit donations. Her parents and a few others responded, and in March the Rademachers closed on a $320,000 home in Cheyenne, Wyo.

HomeFundMe, a service launched by lender CMG Financial last year, is among a growing suite of services that help borrowers cobble together the funds to buy homes. These companies—startups and established players in the housing market alike—say they’re offering options for borrowers who have good credit and income but are struggling to save.

Rising consumer debt and high prices have made it tough for first-time buyers to save for a home. Nearly 40% of renters ages 25 to 34 said they were saving nothing each month for a down payment, according to a survey last year by rental-listing company Apartment List.

One startup, Loftium, will supply up to $50,000 for a down payment if the homebuyer agrees to rent out a room on Airbnb and share the income. A few organizations, like Unison Agreement Corp. and Landed Inc., offer “shared equity” contracts through which buyers get money for their down payments in exchange for pledging part of the home’s future value to investors like pension funds or foundations. And some banks, including Bank of America Corp. and Morgan Stanley, have programs through which young adults can get a mortgage with nothing down if their parents pledge investment assets as collateral.

Yet some worry that helping borrowers get down payments could actually exacerbate the housing market’s main problem: a dearth of new homes.

Reese Rademacher said she initially felt uncomfortable asking friends and family for help through HomeFundMe. Now some of her friends are interested in following suit.

Liz Osban for The Wall Street Journal

Economists caution that actions such as loosening credit standards or supplying borrowers with more down payment money worsen the problem by creating more demand in a supply-constrained market, leading to a further overheating of home prices. And if home prices later fall, borrowers with little of their own money invested are more likely to simply walk away, they say.

Jonathan Lawless, vice president for product development and affordable housing at mortgage-finance giant Fannie Mae, said the agency is currently focusing not just on making credit available but also on increasing housing supply. For example, Fannie is looking at ways to make it easier to get loans to fix up dilapidated homes and make it simpler to finance the purchase of mobile homes.

Borrowers for years have been able to take out mortgages with small down payments. They can get mortgages with down payments as low as 3.5% through the Federal Housing Administration, and Fannie and Freddie Mac back loans with down payments as low as 3%. But these loans tend to have high monthly costs: They usually require mortgage insurance, and the bulk of the first payments can go to interest, not principal.

Erik and Rafaela de los Reyes considered applying for an FHA loan to buy a home in Seattle but were put off by the mortgage insurance and other costs. They instead got $28,000 from Loftium, the startup that offers funding in exchange for a cut of their Airbnb income. The couple have pledged to rent out their mother-in-law suite for three years.

“If you don’t have the down payment, it’s a great way to start,” said Mrs. de los Reyes, a 29-year old flight attendant. She and Mr. de los Reyes had never been Airbnb hosts before, so they were apprehensive. But as for their guests, Mrs. de los Reyes said, “we barely see them.”

Yifan Zhang got the idea for Loftium after renting out a spare room in her Seattle home. One of her goals, she said, is to even the playing field between millennials whose parents can help them buy their first home and those who are trying to save on their own.

“If you’re willing to kind of sacrifice and generate this extra income, then you should be able to have this leg up in homeownership,” said Ms. Zhang, the company’s CEO and co-founder.

These novel arrangements can be tricky to pull off. Fannie and Freddie buy loans made through some of these programs but can’t always package and sell them in standard mortgage-backed securities. Only a handful of lenders are willing to make mortgages with such creative foundations. Most of the programs are still in the beginning stages, and Loftium is available only in the Seattle area.

About 400 borrowers have used HomeFundMe to help buy homes since the program launched in October. On average, they raise about $2,500, though CMG also can kick in matching grants, and most borrowers have some of their own money saved as well, said chief marketing officer Paul Akinmade. Friends and family can also make their gifts conditional, meaning borrowers won’t get the money unless they actually purchase the home.

Mrs. Rademacher said she felt uncomfortable at first asking for help through HomeFundMe. But the Rademachers’ budget was tight after paying for their wedding, and a credit union had already denied their mortgage application because they didn’t have enough in savings.

“Whenever I emailed people the link, I would explain, ‘This isn’t fake, this is real,’” Mrs. Rademacher said. Now, some of her friends are interested in following suit. “It just worked out so well,” she said, “that people were like, ‘No way, I want that!’”

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Source: Housing Trends Feed