By Liz Dominguez
Crowdfunding has appeared in the real estate industry in a variety of forms: house flip investing, mortgage payoff and down payment support. High fees and legality issues have made it difficult for the popular funding method to be taken seriously within U.S. real estate markets.
A new crowdfunding platform—HomeFundMe—was recently launched by CMG Financial, a privately-held mortgage banking firm. This could be a game changer, since it's the first crowdfunding service approved by Fannie Mae and Freddie Mac.
Here's what CMG financial says about HomeFundMe:
- No fees for using the service (Anything deposited into HomeFundMe can be used towards the buyer's down payment.)
- Better loan terms, more buying opportunities and the possibility of getting rid of or lowering mortgage insurance
- Potential to receive a grant ranging from $1,000 to $2,500 in exchange for completing required homebuyer education or housing counseling.
- Matching donations ($2 for every $1) up to the grant limits once the counseling is completed
While over 100 people have already used the platform, Fannie Mae and Freddie Mac have only approved the service on a trial basis until June 2018. The mortgage giants are keeping a close eye on results before giving it their stamp of approval.
There are a few caveats, of course. Borrowers must first be pre-approved for a mortgage by CMG Financial in order to use the crowdfunding service, which is limited to $7,500 in gifted funds. The loan must also be a Fannie Mae- or Freddie Mac-approved loan (their 30-, 20- and 15-year fixed loans are eligible, as well). In addition, borrowers must earn less than their area's median income in order to qualify for matching contributions/grants.
This method will force borrowers into CMG Financial's rates and fees. Millennial and Gen Z buyers, who are most likely to use such a service because of challenges in obtaining a down payment, will not be able to shop around for the lowest rate—a huge snag that may turn off borrowers from the crowdfunding service.
While other services charge fees and may complicate loan processing, borrowers will have to compare costs, as they may be able to save by using an alternative lender.
Here are some other crowdfunding options:
- HomeFunded: 5 percent usage fee on total funds and 2.9 percent for processing each transaction
- GoFundMe: 5 percent usage fee per donation and 2.9 percent plus $0.30 for processing each transaction
- FeathertheNest: 5 percent usage fee per donation and 2.9 percent plus $0.30 for processing each transaction
- Honeyfund: No usage fee and 2.8 percent plus $0.30 for processing each transaction
Keep in mind that these services may come with additional gifting restrictions in the lending world. Most Fannie, Freddie and FHA loans only allow gifted down payment funds from family and close friends. Loan processing may also be more time consuming if using these services, and you stand the chance of being rejected by lenders.
Crowdfunding may be a quicker way of amassing down payment reserves, but it can be a complicated process—extending your mortgage commitment dates or even threatening your loan approval. It may, however, be a useful option for borrowers who are dealing with high student loan or other debt payments and can't afford to save.
If given final approval, HomeFundMe may open the door to a widespread financial backing of crowdfunding services in the real estate industry.