While we’ve come a long way since housing bottomed, the memories of how we got there still don’t feel very distant.
A lot of things contributed to the complete breakdown of the real estate market, with exotic financing being one of them.
So it’s no surprise that the new hot trend of “1% down mortgages” is now coming under the microscope.
Freddie Mac Is Changing the Rules Pertaining to 1% Down Mortgages
- While 1% down mortgages have been all the rage lately
- Freddie Mac is cracking down on the higher-risk home loans
- Requiring a minimum 3% borrower contribution
- That can’t come via the transaction itself via lender credits, points, etc.
Over the past couple years, many large lenders have introduced home loan programs that require just 1% down from the borrower, including big names like Quicken, Guaranteed Rate, Guild Mortgage, and even wholesaler United Wholesale Mortgage.
In fact, just this week another lender joined the party, Garden State Home Loans, giving home buyers in Connecticut, Florida, New Jersey, and Pennsylvania the chance to achieve the American Dream with just a 1% down payment.
As far as I can tell, most if not all of these programs rely upon Freddie Mac’s Home Possible Mortgage program, which is its 97% LTV offering.
However, it turns out that some lenders may have taken it a little too far because Freddie Mac doesn’t seem comfortable with their interpretation of the program.
Last week, Freddie Mac released a bulletin pertaining to lender gifts and grants on Home Possible Mortgages (their 3% down program) that is effective November 1st, 2017.
Basically, they’re revising their guidelines for Home Possible Mortgages to require a 3% borrower contribution that isn’t funded through the mortgage transaction.
Specifically, Freddie notes that the down payment money can’t come from “differential pricing in rate, discount points, or fees.”
So it sounds like some of these programs offered the 1% down option in exchange for a higher mortgage rate, kind of like how a lender credit allows borrowers to pay nothing out of pocket in the way of closing costs.
A borrower may be able to put less down, but they could wind up with a higher mortgage rate as a result.
Some may say there’s nothing wrong with that – heck, you see it on mortgages where borrowers put less than 20% down too.
But Freddie seems to think this practice is skirting the rules, or perhaps taking advantage of a loophole, and thus they’re closing it in the coming months.
That could mean that some (or all) of these 1% down mortgage programs will fall by the wayside, but that remains to be seen.
In any case, Freddie will still allow gifts or grants from the seller as the originating lender, but only after a minimum contribution of 3% of the value (lesser of the appraised value or the purchase price) is made by the borrower.
What This Means for You
- While 1% down home loans may still be available via other avenues
- It does mean it’ll get more difficult to obtain one going forward
- This means having down payment funds at the ready is imperative
- Especially in today’s competitive housing market where multiple buyers bid for the same property
These 1% down programs may not be done entirely, but the lenders offering them could have to figure out a new way to offer such financing. Or do it without Freddie Mac.
In the meantime, it might be advisable to set aside enough money to cover a 3% down payment, which is still a pretty small amount to put down on a home.
It’s a slightly smaller requirement than what the FHA calls for (3.5%), making it one of the most flexible loan programs around, even without the gift/grant money.
Furthermore, you pay for the privilege of putting down so little, often in the form of a higher mortgage rate and/or mortgage insurance, so consider that when deciding on an appropriate down payment.
It could make financial sense to put down more on a home if you have the means, and it could also help you secure a winning bid with all the competition in today’s housing market.