Crowdfunding a Mortgage Downpayment

Crowdfunding has shaken up the way people borrow and lend money. Aside from impacting the banking industry, the crowdfunding effect is also touching real estate. Homebuyers may consider online fundraising their down payment, but those funds may not qualify for the transaction. A mortgage depends on the loan program, who provided the money, and the lender’s documentation requirements. Before deciding to move forward with using crowdfunding for your next home down payment you should review all the details.

A financial advisor can help you figure out how to finance and purchase a new home.

Crowdfunding Your Mortgage

Crowdfunding can supplement your income, but the home buying process involves more than a down payment. Your mortgage lender will also consider whether the contributions qualify under the rules for your mortgage. They may require you to verify the origin of your funds. Check those requirements before counting online donations toward the amount you plan to bring to closing.

1. Crowdfunding Can Be a Tough Sell

When you set up a crowdfunding campaign, you have to convince people why you deserve their money. There needs to be a compelling story that demonstrates why they should help you with your mortgage downpayment.

Potential contributors have many competing reasons to spend or donate their money. You may have trouble raising money for an ordinary home purchase, so set reasonable expectations. Crowdfunding may not help when you need to reach a specific savings goal by a particular date.

2. Crowdfunding Is Still Subject to Gift Guidelines

A piggy bank in front of a chalkboard reading "crowd funding."

Mortgage rules can restrict which gifts qualify toward a home purchase. For example, Fannie Mae permits personal gift funds from family members or a similar, serious relationship to the borrower. Someone connected to the sale, such as the builder or real estate agent, generally cannot serve as the gift donor. That means donations collected through a crowdfunding campaign may not qualify, even if you have the cash in hand.

Acceptable gifts also need a paper trail. Under Fannie Mae guidelines, the lender generally obtains a signed gift letter. It states the amount, identifies the donor, and confirms they do not expect repayment. The lender must also verify that the donor had the money or transferred it to the borrower or closing agent.

Depositing money raised online into your bank account ahead of a mortgage application does not by itself resolve these questions. Depending on the transaction and the amount deposited, a lender may need evidence it came from a permitted source. Save contribution and transfer records so you can provide them if requested.

3. Crowdfunding Isn’t Free

Crowdfunding platforms are a business just like anything else, no matter how philanthropic they may seem. While anyone can start a campaign on one of these sites, you’re most likely going to have to pay a fee to do it. If the fee is high, it can eat into the money that you’re trying to raise for your down payment.

Fees depend on the platform, so calculate how much you would actually receive rather than setting your target equal to the amount you need for the home. Also check whether the platform permits personal fundraising. Kickstarter, for example, is designed to fund creative projects rather than personal expenses. For eligible projects that reach their funding goal, Kickstarter currently charges a 5% platform fee, while its payment processor generally charges another 3% to 5%.

What to Do Before Using Crowdfunding for a Down Payment

Start with your lender rather than the fundraising platform. Ask what sources of down payment money your loan program permits and what records you would need to provide. This can tell you whether crowdfunding is worth pursuing before you collect money that may not qualify for the mortgage.

Then work backward from the expected cost of buying the home. Estimate the cash you will need at closing and decide how much you want to have left afterward. Compare that figure with the money you have already saved to see whether you actually have a shortfall and, if so, how large it is.

Avoid committing cash that serves another important purpose just to increase your down payment. An emergency fund can become especially useful after buying a home because repairs, maintenance, and other expenses can arise without much warning. A larger down payment may reduce the amount you borrow, but it should be weighed against the cash you want available after the purchase.

Check for homebuyer programs that could reduce the amount you need to accumulate on your own. Assistance varies by mortgage program and location, and eligibility may depend on factors such as income or whether you are a first-time buyer. Compare any available assistance with crowdfunding before deciding how you will cover the remaining cash needed for the purchase.

Best Alternative to Crowdfunding

Crowdfunding does not give you certainty about how much money you will collect or whether all of it can be used for your mortgage. Building the money yourself gives you more control over both the amount and the timeline. Review your monthly income and expenses, decide what you can consistently direct toward a home fund and keep that money separate from cash reserved for emergencies.

Your mortgage readiness also depends on more than the down payment. Review your credit, existing monthly debt and overall cash position while you save. Improving those areas can affect the loan options available to you and may put you in a stronger financial position when you are ready to apply.

You can also work with a financial advisor to help you carve out the right path in order to help you achieve your long-term financial goals.

Bottom Line

Crowdfunding can provide extra money toward a home purchase, but it is not a substitute for checking what your mortgage actually permits. Before relying on donations, find out whether the money will be acceptable to your lender and what records you will need. Compare the amount you expect to raise with your own savings, available homebuyer programs and the cash you want to retain after closing.

Tips for Buying a Home

Talk to a financial advisor about how buying a home will factor into your larger financial plan. You want to ensure you can purchase a home without sacrificing your other financial goals, and a financial advisor can help create the right plan to do that. Finding the right financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Make sure your credit score is in good shape. With a high credit score, you can get lower mortgage rates, which translates to lower monthly mortgage payments.