When Joyce Ayaribire, a clinical technician at Inova Hospital and single mother of two boys, wanted to leave her Alexandria, Virginia, apartment because she was concerned about the safety of the neighborhood, she didn’t think purchasing a home would be an option.

“I wanted to buy a house if I could, but I didn’t have the cash for a down payment and I didn’t know how I could qualify for a loan,” Ayaribire says. “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, like 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 down payment. Her boys, 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.

For Ayaribire and others, the process of becoming a homeowner includes physical labor as well as financial prep.

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.

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

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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 down payment.

How some of the programs work

Each program has slightly different rules, but in general, the concept of sweat equity is to improve the housing stock through building affordable homes or renovating distressed ones 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 must also qualify for the mortgage with a credit profile, job history and income sufficient to repay the loan.

“A major misconception about Habitat for Humanity is that it’s a low-income giveaway home program,” says the Rev. John Smoot, executive director of Habitat for Humanity of Northern Virginia in Alexandria. “We’re actually a general contractor and a lending institution. We’re regulated by the federal government like any other lender.”

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.

Freddie Mac recently introduced sweat equity to its down-payment options for its Home Possible loan program.

“The Home Possible mortgage requires a 3% down payment, but that money can come from a gift, a grant from a down-payment assistance program, family members or your employer,” says 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 down payment sources.”

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The Home Possible program is limited to households with an income at or below 80% of area median income based on their household size. For example, in the Washington area, median income is $121,300 for a four-person household. Sweat equity can cover 100% of closing costs and down payment for this loan program.

“The idea is that a seller has to be willing to let the buyer work on the house prior to the purchase,” Gardner says. “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 says the program is so new that no one has participated yet, but he says 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 says. “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 says the Freddie Mac sweat-equity program is modeled on the successful USDA Mutual and Self-Help Housing Program, which is also 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% interest rate. There is no cash down payment required and some closing costs can be financed as well.”

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

They must complete 65% 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 program.

In Milford, Delaware, for example, the Milford Housing Development Corp. has been working with churches and civic groups for 20 years to help families build or renovate houses. While the maximum income allowed for their programs is 80% of area median income, Russell Huxtable, vice president and chief operating officer, says that most participants earn 50% of area median income.

“The borrowers get credit counseling and financial literacy training to make sure they can repay the loan,” Huxtable says. “We work with the applicants to meet USDA standards, which means they can’t have two late mortgage or rent payments in the last two years, an IRS lien or a foreclosure in the past 36 months. We try to incorporate the closing costs into the sweat equity, too, so we can reduce their cash needs.”

Huxtable says the loans and family circumstances are reviewed every two years after the closing and sometimes borrowers’ payments increase if their income can accommodate it to repay some of the government subsidy of their loan.

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“This is great option for people here because otherwise they wouldn’t be able to own a home,” Huxtable says. “Most of our participants are single-female heads of household with kids, with an average income of $30,000. The median sales price of homes in this area is $300,000, so they would never be able to afford that on their own.”

Most of the families Habitat for Humanity in Northern Virginia serve earn between 50 and 80% of area median income, Smoot says.

“We work with for-profit developers to carve out a few homes for our families from their portfolios and look for public land, but there’s very little available in Alexandria and Arlington,” Smoot says. “We build condos and town houses as well as single-family homes and do some complete renovations, too.”

To qualify, families apply through the Habitat for Humanity website. The families are filtered, prioritizing those who live in unsafe, distressed, overcrowded or inadequate housing, Smoot says.

“We meet with the families and make sure we can keep their housing payment at a maximum of 32% of their income to make sure they’ll be successful homeowners,” Smoot says.

The applicants have two 30-year mortgages with zero interest, he says, and Habitat for Humanity has the first right of refusal if they want to sell in the future.

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“If the borrowers stay in the house for 30 years, they own it free and clear, but if they sell it earlier, then they get back what they paid and share the equity,” Smoot says. “If they sell in year one, 100% of the proceeds would go to Habitat for Humanity, so we avoid anyone trying to flip a house. But we have very little turnover.”

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 nonprofit organization, according to Fannie Mae’s lender-servicing guide. When sweat equity is accepted, borrowers must also contribute at least 3% of the purchase price from their own funds. For example, on a one-unit property financed with a HomeReady loan, a 5% down payment is required, 2% of which may come from sweat equity.

It is more than just swinging a hammer

An unexpected benefit to sweat equity, says Ayaribire, 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 says. “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, says Smoot, then another 350 hours of sweat equity are required.

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“Many of our applicants are working two or three jobs, so we give them lots of ways they can do their hours,” Smoot says. “Some of them swing hammers, but they can also help us with customer service, work in the office or work in the ReStore. You don’t have to be skilled to do this, but you do have to be somewhat able-bodied to work on a house.”

Nonprofit organizations like Habitat for Humanity and the Milford Housing Development Corp. 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 says. “The labor savings are significant.”

The Milford program’s group concept — no one can move in until everyone’s house is finished — is like an Amish barn raising, Huxtable says.

“There’s a shortage of housing and it’s hard for people to save for a down payment, so a sweat-equity program can help renovate this country’s aging housing stock and help people achieve their homeownership goals,” Gardner says. “The challenge is familiarizing everyone with the concept and matching people who have the ability to do some of their own work with the right project and loan.”

Several sweat-equity programs can’t be contacted directly. To find one, search for local nonprofit organizations that offer housing assistance and ask local lenders if they can help you with a USDA, Home Possible or Home Ready mortgage.