If you’re short on a down payment, mortgage crowdfunding might be tempting.
It’s a newer trend that’s popping up in the mortgage industry. But is mortgage crowdfunding a good idea or a slippery slope? On the one hand, it could open up homeownership possibilities for more people. On the other hand, it may be indicative of a larger problem. More on that later. First, let’s talk about crowdfunding.
What is crowdfunding?
You may have heard of crowdfunding in the general sense. This involves someone starting a webpage (usually using a service like GoFundMe or Kickstarter) where their friends and family can go to donate money. Crowdfunding platforms have been used to raise money for everything from starting a business or funding an overseas trip to lightening the burden of funeral expenses or paying for medical bills.
Generally, crowdfunding is a great way to raise money and get people involved. Because it’s done online, there’s no need to make phone calls or directly ask people to donate. And since asking for monetary donations in any capacity can be awkward, the online format conveniently takes away the need for face-to-face interaction. Donors can submit a one-time gift where all they need to do is enter credit card or checking account information. If you’ve ever bought anything online, crowdfunding is a simple process you’d be familiar with.
The down payment challenge
Saving for a down payment has always been a challenge for home buyers. It’s why there are all kinds of grants, housing lotteries, low down payment options, down payment assistance programs, and rules for allowing gift funds. All of these programs and incentives help to ease the financial burden of coming up with a cash down payment.
But if that’s the history, the present landscape doesn’t help much. The current housing market is not the most favorable for buyers, especially first-timers. Home prices are high, rates are inching upward, and there’s not much inventory. As the market contracts, it doesn’t look so good for home buyers who may have already had a hard time trying to scrape up the funds to make a down payment.
Then there’s student debt. The Millennial generation is coming up as the largest home buying generation in history, surpassing Baby Boomers. At the same time, no generation has more student debt than Millennials. And debt is a deciding factor when you’re being considered for a mortgage. Mortgage lenders calculate a person’s debt-to-income ratio, and if that ratio doesn’t meet their lending requirements, that person can be denied a mortgage.
Start the conversation
See, the lender’s goal is to lend money to financially responsible people who can prove they’ll pay it back in full and on time. You can still get a mortgage if you have debt, it just depends on a lot of other factors and there are no guarantees.
You can still get a mortgage if you have debt.
That’s why it’s important to just get on the phone with a mortgage lender and have that initial conversation. They’ll be able to tell you if you’re in a position to borrow. And if you’re not (say, because your debt-to-income ratio is too high) they’ll be able to give you tips for improving that ratio, like restructuring your finances to help pay off some of the debt or taking a second job in order to bring in more income. Of course, if this or similar advice is given to you by a loan originator, you should consult your financial advisor before making any changes.
So if homeownership is a lifelong goal, you’re struggling to come up with a down payment, and maybe you’ve even got some debt holding you back, mortgage crowdfunding doesn’t sound like such a bad idea. If you have friends and family who are willing to help you out, why not go for it?
The underlying issue
Mortgage crowdfunding could be indicative of a larger problem. For one, it seems like a telling sign that the borrower doesn’t have the funds to afford a house. And if that’s the case, we can safely ask: is this person ready for the financial responsibility of homeownership?
Mortgage lenders tend to be more wary of approving loans with down payment assistance of any kind for this reason. It’s kind of like how they determine the credit risk a potential borrower presents based on their FICO score or job history. This is why lenders started requiring mortgage insurance on mortgages with down payments lower than 20%. Mortgage insurance protects the lender in the event that the borrower defaults.
Mortgage crowdfunding could also indicate that the borrower has little to no savings, and that’s a dangerous way for anyone to enter homeownership. A home buyer with no savings is one major home repair away from defaulting on their mortgage payment.
Mortgage crowdfunding could be indicative of a larger problem.
Mortgage crowdfunding could also start a trend of irresponsible home buyers. Let me explain. Look at what’s in the name: homeownership. Generally speaking, when you own something, when you’ve invested in something with your own hard-earned money, you’re more likely to take care of it. If your money’s in it, it’s likely that you’ll make payments on it, rather than slip into default because you got a free ride on other people’s cash.
The bottom line
Homeownership is a beautiful thing. How awesome would it be if every American family was able to achieve that goal? We should be thinking of new ways to unlock homeownership for more people. But given the evidence that stands against mortgage crowdfunding, it doesn’t seem like a smart solution.
It’s the same reason why there are rules for gift funds. You can be gifted money that you use toward a home purchase, but every lender has guidelines in place for this so that it’s not abused.
What it all boils down to is the financial ability and responsibility of the borrower. If they’re using mortgage crowdfunding to increase the personal funds they’re already bringing to the table, that might be a smart way to make a bigger down payment, lower their monthly costs, or improve their loan terms. But if they’re crowdfunding because they don’t have any or enough money to afford the costs of homeownership, then it’s fair to say that mortgage crowdfunding is not only unsustainable, it’s not smart.
Need a little help?
If you’re short on down payment funds, there are better ways to make homeownership happen. At Cardinal Financial, we carefully review your financial status and determine whether you’re in a position to take on a mortgage payment. If it looks favorable, we’ll craft the perfect loan to fit your unique situation.
We have several loan products that accept low down payments: 3.5% for FHA loans, 3% for Conventional, 0% for USDA, and 0% for VA loans. We’ve even got down payment assistance programs in certain states. So, if you like what you just read, we think you might like our mortgage rates too. Fill out our free quote form and one of our loan originators will call you shortly to talk about your options.
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