The Innovative Down Payment Saving Method You’re Not Using

published Dec 15, 2018
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Thanks to social media, we can now turn to our friends (both online and IRL) for just about anything. Whether you’re looking for travel recommendations or advice on your high school reunion outfit, connecting is easier than ever.

Another thing you can ask your friends for? Cold hard cash. Crowdfunding platforms like Fundly and Kickstarter have made it simple to ask for financial assistance for everything from unexpected medical bills to start-up seed money.

And now crowdfunding has made its way into consumer real estate, too. Services like HomeFundIt and Feather the Nest allow you to amass a down payment via social media fundraisers.

This may seem a little extra, but for millennials, saving up for a down payment is commonly the hardest task in accomplishing homeownership. Yes, the oft-cited 20 percent down payment is less common than ever, but even lesser amounts can prove daunting—especially as so many young people have student loans to pay off. According to the National Association of Realtors, 23 percent of homebuyers ages 36 and younger said that saving for a down payment was the most difficult task in the home-buying process.

Barbara Carmichael of Saint Joseph, Michigan is a prime example of this scenario. “I knew I could handle the payments, but I had no way of laying hands on down payment money,” says Carmichael. That is, until she saw a flyer advertising HomeFundIt at the CMG Financial Office in her town.

At first, she didn’t think it would be of much use to her because she didn’t know enough people with extra money to spare. But after speaking with Lorrie Brink, a loan officer at CMG Financial, and Jon Wallace, area sales manager for the branch, she was convinced to give it a try.

Much to her surprise, people ended up being very generous towards her goal. She raised just over $6,000 in the end—and even received a large anonymous donation. It was enough to cover her entire down payment on her three-bedroom, two-bathroom home in Coloma, Michigan, plus some extra for repairs.

“My daughter calls it the fairy house, because it looks like it’s out of a fairy tale,” she says.

And in some ways, for Carmichael, it is. Looking for your own Happily Ever After? HomeFundIt or another crowdfunding service may do that for you, too. Here’s how to find out:

(Image credit: Daniel Kim Photography/Stocksy)

How it works

To use HomeFundIt, you must first complete an online application to be pre-qualified—which is the standard first step in the mortgage loan origination process. Then you can include photos, video, and text to help potential donors better understand your goal.

“Keep it clear and concise; less is usually more,” Brink says. You should let donors know why home ownership is important to you and why you’re using the service. However, it does not need to be overly detailed.

Anyone can contribute easily to your online campaign and HomeFundIt charges no transaction fees. Friends and family can decide whether their contributions are conditional, meaning donations will only be disbursed if the you end up buying a home, or non-conditional, meaning you’ll get the money whether or not you purchase.

Once a campaign is active, you must close on your home in the next 12 months. As part of the service, you’ll also be connected with both a fundraising coach to help with your campaign and a loan officer to assist with the mortgage financing process.

“If your funding exceeds your goal, you will get to keep extra funds,” Brink explains. “You can apply these funds to a larger down payment, which may lower the insurance requirement and loan amount, resulting in a smaller monthly payment.”

(Image credit: Trinette Reed/Stocksy)

If you’re looking to fund more than just your down payment, take a look at Feather the Nest, which also allows you to collect donations for other real estate-related needs, like renovations or even furniture. There is no charge to set up a “nest,” but there is a 5 percent transaction fee on every donation as well as a 2.9 percent plus a 30-cent credit card processing fee. However, you’ll get the money faster—each donation is transferred directly to the user within 10 minutes of it being given.

Should you use it?

In its first year, more than 450 families raised more than $1.42 million toward down payments via HomeFundIt.

Leneiva Head, principal broker and owner of Tennessee-based Welcome Home Realty, says that using a crowdfunding service for a down payment is an innovative way for buyers who are struggling to come up with funds on their own.

“As long as the gifts are properly documented, the opportunities made available through crowdfunding are great, out-of-the-box ways to secure a down payment,” Head says.

But, like most things, crowdfunding isn’t for everyone: Brink recommends that you should carefully consider how active your social media network is before starting the process. If you don’t regularly use social media or aren’t comfortable asking your network to donate, it may not be a fit for you.

Not interested in crowdfunding? No worries. There still are other innovative ways to come up with a down payment, like withdrawing from your Roth IRA and using automatic saving strategies.