One percent down on a new home loan? Zero down? Generous gifts of thousands of dollars from mortgage companies to help you swing the deal?
If any of these sounds attractive to you, hereâ€™s a little sobering news: One of the countryâ€™s two largest mortgage sources is eliminating them.
In a surprise move, giant investor Freddie Mac announced that it is ending purchases of certain low down payment loans that include lender contributions to the buyersâ€™ down payments. Under these programs, a lender might reduce the required minimum down payment on a Freddie Mac â€œHome Possible Advantageâ€� loan from 3 percent to just 1 percent. The 2 percent difference would be provided by the lender as a gift.
Under the revised policy, borrowers will need to come up with at least 3 percent of the value of the house from their own personal resources for the down payment, though some of the money can come from traditionally allowable sources, such as gifts from relatives. If lenders choose to provide grants or gifts to borrowers, they can only do so after the borrower makes the required minimum investment of 3 percent.
Freddie Mac did not provide a specific reason for its abrupt change, but stipulated that lenders providing gifts or grants to borrowers should not charge higher interest rates or fees to recoup their investments. Industry sources told me that some lenders were charging significantly higher rates and other compensation under Freddieâ€™s popular low down payment program, and that borrowers werenâ€™t always aware that the seemingly magnanimous gifts from the lender were being financed by themselves through higher monthly payments over time.
Known as â€œpremium pricing,â€� the practice was not prohibited by Freddie previously but now is banned. Industry sources also said that Freddieâ€™s policy of allowing 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.
Hereâ€™s a hypothetical example of how the premium pricing worked in some 1 percent down programs. It was provided by Judy Zucker, vice president of FM Home Loans LLC of New York. A lender might charge an interest rate of 4.125 percent for standard 3 percent down loans but would hike that to 4.75 percent for a mortgage with a 1 percent down payment and a 2 percent gift.
Zucker, whose firm has not offered super-low down payment loans with gifts, said on a $350,000 home purchase the premium pricing would add $162 a month to a borrowerâ€™s payments â€” potentially for 30 years.
â€œPersonally,â€� Zucker, wrote in an email, â€œI feel itâ€™s not necessarily in the best interests of the client to take these loans.â€� Thatâ€™s especially the case if the pros, cons and costs of the loan are not properly explained by the loan officer.
Freddie Macâ€™s policy switch wonâ€™t mean that very low down payment mortgages will disappear from the marketplace. Fannie Mae, Freddieâ€™s larger competitor, continues to offer these loans through its network of participating lenders. Unlike Freddie, Fannieâ€™s rules have prohibited premium pricing and have required lenders to ensure that their â€œgiftsâ€� are truly gifts, not financed by higher charges to the borrower tucked away somewhere in the transaction.
Mat Ishbia, president and CEO of United Wholesale Mortgage, a large national lender and early proponent of super-low down payment loans, told me his companyâ€™s approach has been to provide â€œtrue giftsâ€� â€” up to a $5,000 maximum â€” from the start.
The interest rate and fees on a standard 3 percent down payment mortgage from his company, according to Ishbia, are the â€œexact sameâ€� as on a 1 percent down loan that uses gift contribution. Ishbia said his firm has funded â€œ thousandsâ€� of super-low down payment loans, and high demand has forced him to double the initial $10 million set aside for gifts to $20 million. Ishbia said the company has sold the loans to both Freddie Mac and Fannie Mae.
So what does all this mean to you if youâ€™ve been planning to buy a home with a tiny down payment? To begin with, be aware of the premium pricing issue: None of these loans involving â€œgiftsâ€� should charge you more than a standard 3 percent down plan. Ask about it.
Also be aware that 3 percent and 1 percent loans come with their own special requirements: income limits and sometimes higher credit score minimums. If youâ€™ve got sub-par credit, donâ€™t expect any gifts from the lender.
Ken Harneyâ€™s email email@example.com. Harney is executive director of the National Real Estate Development Center.
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