More Lenders are Allowing Home Buyers to Crowdfund their Down Payment

Rising home prices, which are estimated to be increasing at more than double the pace of average hourly earnings, are making it even more challenging for potential homebuyers to come up with the down payment needed to obtain a mortgage.

Zillow estimates that the median home price nationwide is expected to grow by $6,275 over the next year. As a result, the average American home buyer would need to save an additional $1,260 — or $105 per month — to account for a 20% down payment on a home purchase a year from now (See Chart 1). In high priced markets, the task of saving for a greater down payment is even more daunting. In San Jose, CA, the median home value is expected to increase by nearly $36,000 next year. That means a buyer would need to save an additional $599 per month just to meet the increased down payment.

Crowdfunding a Down Payment

As a result, more lenders are searching for innovative solutions to help would-be buyers come up with a down payment. One of the more innovative solutions is to allow buyers to crowdfund their down payment. Crowdfunding is the the practice of raising money from a pool of many donors, who are typically friends, relatives and other acquaintances.

Increasingly, new lenders such as HomeFundMe (of CMG Financial), GoFundMe and Feather the Nest are assisting buyers with crowdfunding their down payments. In the case of HomeFundMe, approval was recently received from Fannie Mae and Freddie Mac for borrowers to accept money from a wide array of potential donors, not just friends and family.

Drawbacks

While crowdfunding a downpayment sounds like a great idea, there are some possible drawbacks to keep in mind, including:

• Captive Market: Borrowers typically must utilize the lending services of the crowdfunding company. This means a buyer cannot shop around for the best rate.
• Costs: Some crowdfunding companies will collect a portion of the crowdfunded down payment as well as miscellaneous processing fees. For instance, GoFundMe and Feather the Nest both take a 5% cut on personal campaigns, in addition to a payment processing fee of 2.9% plus 30 cents per donation.
• Saving Discipline: In general, the concept of crowdfunding can sometimes mask possible problems with the spending habits of buyers, such as the inability to save or put aside money from their monthly incomes. This can be a problem down the road as buyers try to cope with monthly mortgage payments as well as other periodic housing expenses like hazard insurance, repairs and property taxes. Basically, you can’t crowdfund all your liabilities away.