WASHINGTON – Aug. 2, 2017 – Mortgage financing giant Freddie Mac says it will tighten its restrictions on low-downpayment mortgages starting this fall.
Freddie is targeting mortgages that allow borrowers to purchase a home with a 1 percent downpayment, and it says borrowers will need to come up with at least a 3 percent downpayment before receiving any kind of contribution from a lender.
Lenders often offer mortgages to homebuyers but then sell those mortgages to Freddie Mac or Fannie Mae. Once sold, the lender has more money to help other homebuyers. As a result, new Freddie Mac rules must be followed if lenders prefer not to originate a loan and keep it on the bank’s books.
Freddie Mac and Fannie Mae started offering low downpayment mortgages in 2014 when they rolled out 3 percent down mortgages.
However, some lenders – like Quicken Loans and Guaranteed Rate – then rolled out mortgages with downpayments as low as 1 percent. To do that, the lenders used Freddie and Fannie’s 3 percent program but also “granted” 2 percent of the downpayment to the borrower to arrive at the 3 percent needed to qualify for a Fannie or Freddie low downpayment mortgage.
Under the new guidelines, however, Freddie won’t allow lenders to arrive at the 3 percent downpayment minimum this way.
“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’s 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 lender will still be able to make gifts or grants after the 3 percent threshold has been met, however.
Also, borrowers may still gather funds for the 3 percent downpayment from other sources, such as “a related person, government agencies, employer housing programs and affordable seconds,” says Lisa Tibbitts, a Freddie Mac spokeswoman confirmed to the National Mortgage News.
The new updates take effect Nov. 1. Some lenders have already phased out seller-funded downpayments.
Freddie Mac’s full statement about the change is posted online.
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)