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Sweat equity can help build that new home through Habitat for Humanity in Cedar Rapids, Iowa City

Cedar Valley Habitat for Humanity partner family members and volunteers measure and cut another piece of insulation as t
Cedar Valley Habitat for Humanity partner family members and volunteers measure and cut another piece of insulation as they all work to build a house in southwest Cedar Rapids in 2018. (Jim Slosiarek/The Gazette)
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When Joyce Ayaribire, a clinical technician at Inova Hospital and single mother of two boys, wanted to leave her Alexandria, Va., apartment because she was concerned about the safety of the neighborhood, she didn’t think purchasing a house would be an option.

“I wanted to buy a house if I could, but I didn’t have the cash for a downpayment and I didn’t know how I could qualify for a loan,” Ayaribire said.

“A co-worker told me about Habitat for Humanity, so I applied online and a little more than a year later my boys and I live in the condo I own in Lorton.”

Ayaribire, as with everyone who applies for housing help through Habitat for Humanity, underwent a detailed screening process, took financial education classes and put in 400 hours of “sweat equity” for her downpayment.

Her sons, now 13 and 15, also helped with the renovation of their house and volunteered in a ReStore, which are Habitat for Humanity’s retail outlets for new and used home furnishings and building materials.

In Linn and Benton counties, Cedar Valley Habitat for Humanity in Cedar Rapids works to serve individuals and families.

“Since our inception in 1988, Cedar Valley Habitat for Humanity has served over 250 families through home building or repairs,” said Galen Hawthorne, communications coordinator. “Of that total, 150 are families that own new homes.”

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The amount of sweat equity required to own a home varies depending on who will live in the home, according to Kelly Lamb, Cedar Valley Habitat executive director.

“We do 300 hours for a single homeowner and 400 hours for a family,” Lamb said. “They can volunteer in our Habitat ReStore, fix meals for our volunteers, or clean when the house is done.

“They also can have a certain percentage done by family members or friends.”

Iowa Valley Habitat for Humanity in Iowa City provides homeownership opportunities in Cedar, Iowa, Johnson and Washington counties. Executive Director Heath Brewer said his organization has 89 home mortgages in its current portfolio, but has originated 115 mortgages in its history for new home purchases or rehabilitations.

“We partner with Hills Bank and Trust, which will have a 30-year fixed-rate loan and we will fill any gap in the cost of a home with a zero interest mortgage,” Brewer said. “At the end of everything, the payment for mortgage, taxes and insurance all needs to be below 30 percent of the household income.”

Brewer said home prices can be a barrier for lower income buyers wanting to purchase and rehabilitate an existing home.

“In Iowa City, the housing stock is just too expensive,” he said. “You might be able to quality for a $150,000 loan and have to pay for PMI (private mortgage insurance), but that still wouldn’t get you into a home.

“Iowa City and Johnson County in particular is the most expensive county in Iowa.”

Other programs

Habitat for Humanity may be among the best-known sweat equity programs, but others include USDA direct loan program, Fannie Mae’s HomeReady mortgage and Freddie Mac’s Home Possible mortgage. These loan programs are primarily designed for lower-income households.

USDA Rural Development offers two loan programs in Iowa.

“In the guaranteed loan program, we work with a lender who has developed a relationship with a homebuyer,” said Darin Leach, public information officer with USDA Rural Development in Des Moines. “The lender asks the USDA for a loan guarantee to reduce the risk in the event of a default by the borrower.

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“That’s our most active program. We do about 2,000 of those throughout the year in Iowa for about $200 million in home loans.”

USDA Rural Development also offers a direct home loan program.

“That’s where the homebuyer has gone to a lender and has not been successful in getting a loan,” Leach said. “If they meet the criteria that we have outlined in our program, a good credit score and the ability to pay back the loan, we will do direct lending.

“It is a smaller number of people, but we still welcome applications because we want to do what we can to help those people get into a home.”

Leach said USDA Rural Development primarily makes home loans in communities with 20,000 or fewer residents. It also takes into account the proximity of large metropolitan areas such as Cedar Rapids and Des Moines where residents of smaller communities have more lending resources.

The programs are not for everyone — they can be difficult to find and qualifying for them is not always easy. Plus, buyers need to set aside a chunk of time — as much as 500 hours, depending on the program — to work their volunteer hours.

Still, program leaders say buyers can save anywhere from a few thousand dollars to tens of thousands of dollars. In some cases, they end up not having to make any downpayment.

Each program has slightly different rules, but in general, the concept of sweat equity is to improve the housing stock through building new affordable homes or renovating distressed existing houses with the help of the people who will live there.

The hours those buyers volunteer save on labor costs and can be calculated to function as a down-payment on the property.

The buyers also must qualify for the mortgage with a good credit, job history and income sufficient to repay the loan.

Lamb said a major misconception about Habitat for Humanity is that it’s a low-income home giveaway program.

“When I came here, I had done Habitat volunteering before. Even I was under the impression that people were just given their homes and (former President) Jimmy Carter paid for it,” Cedar Valley Habitat’s Lamb said.

“We have to earn every cent to build a home and our homeowners have a $500 downpayment and a 30-year or 35-year mortgage.”

Not every loan program or lender allows sweat equity to be used toward a home purchase and many that do require the participation of a nonprofit organization to manage the sweat equity hours.

Adding flexibility

Freddie Mac recently introduced sweat equity to its downpayment options for its Home Possible loan program.

“The Home Possible mortgage requires a 3 percent downpayment, but that money can come from a gift, a grant from a downpayment assistance program, family members or your employer,” said Danny Gardner, senior vice president of single-family affordable lending at Freddie Mac in Washington, D.C.

“Allowing sweat equity is just one more way of adding flexibility to downpayment sources.”

The Home Possible program is limited to households with an income at or below 80 percent of area median income based on their household size.

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“The idea is that a seller has to be willing to let the buyer work on the house prior to the purchase,” Gardner said. “Everything has to be documented in the purchase contract and an appraiser has to factor in the value of the renovation work into the property assessment.”

Gardner said the program is so new that no one has participated yet, but he said a seller might be willing to do this instead of negotiating to have repairs done before the sale or through a credit to the buyers.

“An example when this might be appealing is if a house is vacant or it’s an estate sale,” Gardner said.

“We see this working well in an area where neighbors know and trust each other and might be willing to accept a buyer coming in to do the work before the closing.

“Of course, this would all be supported by an appraisal, too.”

Another scenario anticipated by Gardner is a partnership between a nonprofit community development organization and buyers.

Gardner said the Freddie Mac sweat equity program is modeled on the successful USDA Mutual and Self-Help Housing Program, which also is known as the Section 523 program. This program provides grants to nonprofit organizations to help them supervise groups of low-income families to work on each other’s homes, according to Bruce Lammers, administrator of the USDA Rural Housing Service in Washington, D.C.

“The self-help applicants work together in groups of four to 12 families on each other’s homes in rural communities and small towns, and typically receive a direct loan from USDA,” Lammers wrote in an email.

“The USDA direct loan offers a reduced mortgage payment with as low as an effective 1 percent interest rate. There is no cash downpayment required and some closing costs can be financed as well.”

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The self-help applicants must qualify for the mortgage to demonstrate that they can afford to repay the loan and must earn 80 percent or less of area median income for their family size.

They must complete 65 percent of the labor required to build the houses in the group until all are completed, Lammers wrote. In some cases, an older home can be rehabilitated with this programs

How sweat equity works toward a mortgage

Fannie Mae allows sweat equity to be an acceptable source of funds for its HomeReady mortgage loans if the lender can demonstrate that the mortgage is part of the HomeReady program and the lending program is managed by a strong, experienced not-for-profit organization, according to Fannie Mae’s lender servicing guide.

When sweat equity is accepted, borrowers also must contribute at least 3 percent of the purchase price from their own funds. For example, on a one-unit property financed with a HomeReady loan, a 5 percent downpayment is required, 2 percent of which may come from sweat equity.

An unexpected benefit to sweat equity, said Ayaribire in Alexandria, Va., is the training she received.

“I had never done anything like it, but we helped with the construction, painting and putting in flooring and I loved it,” she said. “I want to volunteer and do more even though my house is finished.”

Ayaribire also appreciated the financial counseling she received to help her develop a budget and find ways to save that would make it easier for her to afford her home.

At Habitat for Humanity, applicants must complete 50 hours of sweat equity before they begin the intensive financial counseling program, said Smoot, then another 350 hours of sweat equity are required.

“Many of our applicants are working two or three jobs, so we give them lots of ways they can do their hours,” said Jon Smoot, Habitat for Humanity of Norther Virginia executive director. “Some of them swing hammers, but they can also help us with customer service, work in the office or work in the ReStore.

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“You don’t have to be skilled to do this, but you do have to be somewhat able-bodied to work on a house.”

Not-for-profit organizations such as Habitat for Humanity have supervisors who provide on-site training and guidance for volunteers.

“The volunteers don’t do things like the foundation, electrical or plumbing work, but they can do framing, sheathing, insulation, painting, trim work and put in cabinets,” Huxtable said. “The labor savings are significant.”

Washington Post contributed to this report.

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