No down payment? New startup Loftium can help

Peter Miller
The Mortgage Reports contributor

Loftium: A new way to make your down payment happen

This didn’t take long and it’s an absolutely logical outgrowth of the rent-a-room movement: A new Seattle company, Loftium, will provide your down payment if you will rent out a room for them.

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How Loftium works

Loftium has smartly noted that homeowners can make money with such services as Airbnb. At the same time, it has observed that a lot of would-be buyers are unable to purchase because they lack of upfront money needed for a down payment.

Putting these two realities together it has come up with an interesting idea: It will provide homebuyers with down payment money if they will agree to be Airbnb hosts.

The important expression here is provide. Loftium is not lending down-payment money to buyers.

Can Airbnb wreck your refinance mortgage?

“It’s not a loan,” says Loftium. “The down payment we offer is not a debt, it’s a part of a services agreement.

“You enter into a contract with Loftium and when that contract ends — typically after 36 months you don’t ‘owe’ us anything. There’s no payback if we don’t make enough money on the Airbnb income.”

It’s interesting to get down payment assistance, but it’s real interesting to get money which is not in the form of a loan, money which does not need to be repaid. In addition, Loftium is splitting the rental income, meaning the homeowner is also getting some cash out of the deal, money that can be used to pay down the mortgage and for other purposes.

$20,000 up front?

Adam Stelle, a Loftium co-founder, spoke exclusively with The Mortgage Reports and explained his program in detail.

In the Seattle area, says Stelle, the typical home is likely valued in the $500,000 to $600,000 range. With such prices $20,000 up-front from Loftium would be equal to roughly 3.3 percent to 4.0 percent down.

How do such down payments compare with other buyers?

“In 2016,” says the National Association of Realtors, “the median down payment was 10 percent for all buyers, six percent for first-time buyers, and 14 percent for repeat buyers. The median down payment has decreased over time.

How to buy  house with no down payment in 2017

To compare to this trend, in 1989 the median down payment for all buyers was 20 percent, 10 percent for first-time buyers, and 23 percent for repeat buyers.”

Central to the Loftium program is the use of artificial intelligence to project rental levels and incomes from given properties. As an example, if a room is expected to bring in $50,000 over a three-year period, Stelle said Loftium would “prepay $20,000 towards the down payment, then take 70 percent ($35,000) of the rental income and homeowner gets 30 percent ($15,000).

So over the life of the contract, we end up with a net of $15,000, and the homeowner with $35,000.”

Fine print

The Loftium program raises a number of interesting questions:

Can you participate? Right now the program is available only in Seattle but Loftium expects to expand during the coming year.

How is income from the program taxed? Rental income is plainly taxable while the down payment money is a little tricky. Stelle says the up-front funds are regarded as “pre-paid future income,” money which is taxable.

However, new home buyers often have a number of first-year write-offs which can off-set tax expenses. For details and specifics be sure to speak with a tax professional.

Are short-term rentals allowed in your community? There have been cities where short-term rentals are welcome and others which have seen substantial fights. In many jurisdictions short-term rentals are simply not permitted because they compete with the hotels cities welcome and tax. However, the old bans on short-term rentals are now evolving in many areas; to know what is allowed and what’s not in your community you need to speak with a local attorney.

What kind of insurance do you need? If you have a mortgage you’re required to have homeowner’s insurance. The problem is that some insurance companies will not cover short-term rentals, others have limitations, and still others are okay with such rentals. Speak with an insurance broker for details and ask about special riders related to overnight rentals.

What kind of property works best? Renting a room to strangers may be discomforting. For this reason a property with a separate bedroom and bath may be most desirable.

How can you get financing? Not every lender will finance a home where a portion of the property will be used for short-term rentals. Loftium solves this problem by working with a lender that’s okay with short-term rentals.

Eligible properties

Lastly, Loftium is making a contract with people and has certain requirements. Basically, the home must be a prime residence in a Loftium-served neighborhood, the buyer must qualify for the mortgage, and the buyer must also pass a criminal background check. As with all contracts, it’s smart to have an attorney take a look on your behalf before signing.

As home values have outpaced incomes it has become increasingly difficult to acquire down payment money. The Loftium approach is both unique and clever, it will plainly help some buyers, especially in markets with good economics and a strong short-term rental base.

What are today’s mortgage rates?

Today’s mortgage rates have recently crept up, but are still very affordable. However, home prices and interest rates are rising. Sooner maybe better than later to buy a home in today’s markets.

Verify your new rate (Oct 30th, 2020)