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Mortgage

Freddie Mac kills 1% down payment mortgages

Borrowers must now use their own money for entire 3% down

Freddie Mac announced this week that it is changing the requirements to its low down mortgage program and will no longer allow lenders to contribute gifts or grants to reach the 3% down payment requirement.

Under the new guideline for Home Possible Mortgages, borrowers must front at least 3% down in order to receive any type of contribution from a lender.

This includes borrowers under the Home Possible Advantage program, which is Freddie Mac’s affordable conforming, conventional mortgage that allows a 3% down payment to help more first-homebuyers and other qualified borrowers jump into the market.

According to the guide, Freddie Mac is revising its requirements to state that “gifts or grants from the seller as the originating lender will be permitted only after a contribution of at least 3% of value is made from borrower personal funds and/or other eligible sources of funds as described in Guide.”

It added that 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, which means that lenders are no longer allowed to roll the 2% gift back into the loan.

The new updates will go into effect for mortgages with settlement dates on and after Nov. 1, 2017, unless otherwise noted.

Fannie Mae and Freddie Mac started the low down payment trend back in 2014, when both of the government-sponsored enterprises rolled out 3% down mortgages.

Some of the nation’s biggest mortgage lenders signed up to take part in those programs, including Bank of AmericaWells Fargo and JPMorgan Chase.

But other lenders took it a step further by beginning to offer mortgages with as little as a 1% down payment required from the borrower.

Quicken Loans was one of first out of the gate with a 1% down mortgage that launched in late 2015.

Guaranteed Rate launched a 1% down product of its own in the summer of 2016.

Each program saw the lenders “granting” 2% of the down payment to the borrower. Add that to the borrower’s 1% contribution, and you have the 3% needed to qualify for the Fannie and Freddie programs.

Fifth Third Mortgage went beyond Quicken, Guaranteed Rate, and other lenders that began originating 1% down mortgages with Freddie, when it rolled out a 0% down mortgage program last year.

Fifth Third’s down payment assistance program offers 3% of the purchase price in down payment assistance, up to $3,600, for low-income borrowers or those purchasing in a designated low-income area and financed through Fifth Third.

Quicken, Guaranteed Rate, and Fifth Third each worked with Freddie Mac for their 1% down loan program, but those programs appear to be dead in their current format thanks to Freddie Mac’s announcement.

Click here to read Freddie Mac's announcement in full.

3d rendering of a row of luxury townhouses along a street

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