Can You Crowdfund Your Mortgage?
By now, you’ve probably heard of the guy who crowdfunded a $10 potato salad “campaign” and ended up raising more than $55,000 (if not, now you know — crazy, right?). That got us at Credit.com thinking: What other sorts of things can you crowdfund?
The short answer: Pretty much anything (see:potato salad guy). Earlier this month, a conversation popped up online, started by a man who wanted to crowdfund his mortgage. He called himself “just a regular guy.” He’s 34 with three kids and a fiancée, and their only consumer debt is the mortgage. So why the crowdfunding campaign? To reach “financial freedom.”
Here’s his appeal, according to a post on Get Rich Slowly:
Some of you may say, ‘I want to pay my mortgage too! Why the hell would I help this guy pay off his?’ … And I’m sure you’ll ask, ‘What’s in it for me?’ For starters, you get to be a part of a fund that helps a family achieve a life-long goal of having financial freedom. If this still doesn’t answer the questions ‘what’s in it for me?’ or ‘what do I get for donating?’ I answer with a question: ‘Wouldn’t it be great to be a part of something that helped one family at a time?’
Think of that what you will, but if you’re curious: Yes, you can crowdfund your mortgage. Is that the best use of your energy and others’ resources? Maybe. Maybe not. Here are some things you should know if you want to go this route.
Tax Liability
If you donate to someone raising money to buy their home, don’t expect to get a tax deduction for charitable contributions. Donating to someone’s crowdfunding campaign is essentially the same as giving your nephew $20 for his birthday — it’s a gift, not a donation to a nonprofit (unless you’re dealing with a nonprofit trying to mortgage property, but that’s not what we’re talking about here). That’s good news for the recipient, because gifts aren’t considered income.
“Think of it like you go to your all your family and friends and you ask, ‘Can I have $10? Can I have $10?’” said Kim Wales, CEO of Wales Capital and a crowdfunding expert. “It’s kind of the same thing — you’re not going to report that money; they’re gifting that to you.”
If the mortgage is an effort to fund a business venture, from which the recipient eventually expects a profit, that’s a different tax story: If you’re trying to flip a house or build a business, any capital you raise could be taxed, said Jessie Seaman, a senior associate with the Tax Defense Network. It’s all in how it’s used.
“A consumer receiving funds should consider the money as income if the funds are going to be used in an entrepreneurial capacity,” Seaman wrote via email.
So in the case of our father-of-three crowdfunding hopeful, contributions would be considered gifts.
Is Crowdfunding the Choice for You?
Crowdfunding a mortgage isn’t that off-the-wall. Struggling businesses have taken advantage of the platform to corral community support and keep doors open during times of financial hardship. Plenty of newlyweds ask for contributions toward a down payment via wedding registry sites like Honeyfund, and helping someone buy a home could be the best gift that person can imagine.
At the same time, it may not be the best avenue toward homeownership.
“I don’t necessarily believe that someone should just wake up today and crowdfund — it depends on what you’re trying to do,” Wales said. Crowdfunding sites require you to explain your campaign, compose an executive summary and detail the purpose of the proceeds. These sites do this to weed out people who are going to “waste their time and post garbage,” Wales said. “They should make the public aware with what they actually do with the money and how it has benefitted them. It’s still work for the individual. Their integrity is on the line.”
Consider the potential purposes of crowdfunded money: help a business produce an influential product, possibly create jobs, inspire creativity, help someone own a home. None of these are bad options, but if you’re the mostly debt-free family looking to clear your balance sheet, your plea may pale in comparison to the strategic business plan proposed by an entrepreneur. Then again, people may get excited about some really interesting potato salad.
If you’re raising money for your mortgage — whether that’s through a wedding registry, family donations or a crowdfunding site — know that you can’t just turn around the money instantly.
“The money has to come from some kind of a viable source: bank statement, asset statement, some sort of place where the money originated from,” said Scott Sheldon, a mortgage lender and contributor to Credit.com. He explained via email: “If you are trying to crowdfund [a] down payment, I imagine the down payment monies could be used 60 days after the money was in the bank account. If you take cold hard cash and deposit that money in a bank account, it has to sit there for 60 days in order for it to be considered seasoned, where the origin of the money will not be questioned or scrutinized.”
Despite the popularity of crowdfunding, getting an old-fashioned home loan is still your most likely route toward homeownership. In that case, you’ll want to make sure your credit standing is in its best possible shape before applying for a mortgage, because good credit tends to qualify you for lower interest rates, which will save you money over the life of the loan. Here are more details on why you should check your credit before buying a home. And to see where you stand, you can check two of your credit scores for free each month on Credit.com.
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