5 questions lenders must ask before offering 1% down mortgages
August 7, 2017 3:12 PM
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.
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.
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Are these really 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 havebeen 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.
"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
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Are other funding sources available?
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.
"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.
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Will investors buy 1% down mortgages?
Some lenders have already decided to stop offering 1% down mortgages because Freddie Mac will stop buying the loans in November. And the Department of Housing and Urban Development's inspector general has taken issue with premium pricing tied to down-payment assistance provided by state housing finance agencies.
But other lenders are forging on. Guild Mortgage, for example, has "multiple investors" it expects to keep buyingits 1% down loans with 2% lender grants, according to David Battany, executive vice president, capital markets.
But other lenders are forging on. Guild Mortgage, for example, has "multiple investors" it expects to keep buying
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What are the compliance risks?
Down-payment assistance programs are not all created equal, and government agencies differ on their positions about the various options. HUD and its IG have disagreed on some state housing finance agency down-payment assistance with premium pricing. Seller-funded down-payment assistance, which inflated home prices so home sellers could recover the costs, was banned in the government mortgage market after it hurt loan performance.
