5 questions lenders must ask before offering 1% down mortgages

Low-down-payment mortgages help borrowers overcome a key affordability hurdle and give home buyers more purchasing power. But after Freddie Mac recently took steps to curb 1% down mortgages, new questions are emerging about how much risk the industry, and borrowers, should take with these products.

From funding sources to home prices, here's a look at five questions lenders must ask themselves before they can safely offer 1% down mortgages.

Yes and no. While borrowers only need to come up with 1% for the down payment, these loans are typically 3% down products, with the remaining 2% funded through a lender grant. Laying out a 2% grant for the down payment a lender to have a certain amount of cash, and that may be a hurdle for small and midsize lenders.

"It's not widely used in the middle market," said Tom Millon, president, CEO and chairman of the Capital Markets Cooperative, a subsidiary of Computershare that works with smaller lenders.

While some larger players have been making the loans, "the majority of the lenders in the business were not doing this," said Kim Newby, vice president for product development at Waterstone Mortgage.

Freddie Mac, which expects to double the number of low-down-payment mortgages it buys in 2017, allows down-payment grants provided by government agencies for the first 3%, but not lender-funded grants. Fannie generally has disallowed lender-funded down payments for the first 3% of the loan of the loan, but has tested limited exceptions for specific purposes.

"As long as the funding of the down-payment assistance has nothing to do with the transaction or its participants it's generally accepted," said Daniel Jacobs, executive vice president at MiMutual Mortgage.