June 18, 2018

Freddie Mac to Restrict 1% Down Mortgages

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Freddie Mac to Restrict 1% Down Mortgages

Mortgage financing giant Freddie Mac will begin this fall to tighten restrictions on low down payment mortgages that allow borrowers to only contribute 1 percent of the home’s purchase price. Borrowers will now be required to come up with at least 3 percent in order to then receive any contribution from a lender.

Read more: Freddie Mac: Housing Is Still Affordable

Freddie Mac and Fannie Mae started the low down payment offerings in 2014 by rolling out 3 percent down mortgages. Some lenders—like Quicken Loans and Guaranteed Rate—then rolled out mortgages with down payments as low as 1 percent. With those programs, the lender “granted” 2 percent of the down payment to the borrower and added that to the borrower’s 1 percent contribution. They then arrived at the 3 percent needed to qualify for a Fannie or Freddie low down payment mortgage. Under the new guidelines, however, such ways to arrive at 3 percent down payment will no longer be permitted.

“Gifts or grants from the seller as the originating lender will be permitted only after a contribution of at least 3 percent of value is made from the borrower personal funds and/or other eligible sources of funds,” according to Freddie Mac’s new guidelines, issued late last week.

Gifts or grants from the seller must not be funded through the mortgage transaction, such as differential pricing in rate, discount points, or fees for individual loans. Lenders are no longer allowed to roll the 2 percent gift back into the loan, under the revised guides.

The new updates take effect Nov. 1.

The lender will be able to make gifts or grants after the 3 percent threshold has been met. Also, borrowers may be able to gather funds for the 3 percent down payment from other sources, such as “a related person, government agencies, employer housing programs and affordable seconds,” Lisa Tibbitts, a spokeswoman for Freddie Mac, confirmed to the National Mortgage News.

Some lenders have already phased out seller-funded down payments.

Read Freddie Mac’s full statement on the change.

Source: “Freddie to Restrict Down Payment Sources in November,” National Mortgage News (July 28, 2017) and “Freddie Mac Kills 1% Down Payment Mortgages,” HousingWire (July 27, 2017)