Sweat Equity refers to labor performed, or materials furnished, by or on behalf of the Borrower before closing on the property being purchased.
The Mortgagee may consider the reasonable estimated cost of the work or materials as an acceptable source of funds. Sweat Equity provided by anyone other than the Borrower can only be used as the Minimum Required Investment (MRI) if it meets the Source Requirements for the Borrower’s MRI in Handbook 4000.1 II.A.4.d.ii & II.A.5.c.ii. The Mortgagee may consider Sweat Equity that has not already been included in the mortgage however, clean up, debris removal, other general maintenance, and work to be performed using repair escrow cannot be considered as Sweat Equity. Cash back to the Borrower is not permitted in Sweat Equity transactions. For materials furnished, the Mortgagee must obtain evidence of the source of funds and the Market Value of the materials. For labor, verify and document that the work will be completed in a satisfactory manner and obtain evidence of Contributory Value of the labor through an appraiser’s estimate, or a cost-estimating service.
• For labor on Existing Construction: obtain an appraisal indicating the repairs or improvements to be performed. (Any work completed or materials provided before the appraisal are not eligible.)
• For labor on Proposed Construction: obtain the sales contract indicating the tasks to be performed by the Borrower during construction.
For additional information see Handbook 4000.1 II.A.4.d.iii(R) or II.A.5.c.iii(R) available at https://www.hud.gov/program_offices/administration/hudclips/handbooks/hsgh