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Freddie Mac has announced that it will no longer purchase very low down payment mortgages requiring only a 1% down payment from the borrower. The change is effective for mortgages with settlement dates on and after November 1, 2017.
Surprisingly the news comes soon after reports that Freddie Mac expected to double its volume of low down payment mortgages this year.
Details of the Freddie Mac Announcement
Freddie Mac is revising its requirements to state that gifts or grants from the originating lender will be allowed only after the borrower has contributed at least 3% of the home’s value with their own personal funds.
A number of lenders started to offer1% and then zero down payment loans in 2015, after Freddie Mac and Fannie Mae began introducing 3% down payment loans the prior year through its Home Possible Advantage program.
To help homebuyers with the down payment to get in their first home through the program, some lenders have been reducing down payments from 3% to 1% by offering gifts of the remaining 2% to homebuyers.
Why Did Freddie Mac Change Its Rules?
There have been reports of lenders recouping their gifts by charging these homebuyers with higher interest rates, fees or more in discount points. This practice is called “premium pricing.”
In an apparent effort to prevent this, Freddie Mac states in its recent announcement: “Gifts or grants from the Seller must not be funded through the Mortgage transaction, including differential pricing in rate, discount points, or fees for individual loans or across the Home Possible offering.”
The Washington Post reports that some industry experts believe that Freddie changed its requirements because “premium pricing was at odds with the preferences of its government regulator, the Federal Housing Finance Agency, which had expressed concerns over possible consumer misunderstanding and abuses.”
What Does This Mean for Homebuyers?
Although very low down payment mortgages may be harder to come by, homebuyers may still be able to obtain them. That’s because Fannie Mae still offers these loans through participating lenders. However, Fannie Mae’s policy’s clearly state that lenders gifts must be true gifts, not financed with higher interest rates or other charges wrapped within the transaction.
Although Home Possible loan volume was expected , the product still only accounts for 5% of all purchase mortgages that Freddie buys from lenders. Low down payments have less impact on performance when home prices are appreciating. And the higher loan-to-value ratio products, introduced in late 2015, haven’t been through their peak default period yet.
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