A popular mortgage product amongst first-time homebuyers may be gone for
good as Freddie Mac announced changes to their low down payment mortgage
program that prohibits lender contributions, effectively killing the 1
percent down payment option.
The mortgage markets were just beginning to boost originations based on
a government-sponsored low down program that allowed lenders to contribute
“grants or gifts” as a portion of the down the payment. With
property values reaching highs not seen since before the 2008 housing
crisis, the program had gained popularity for first-time homebuyers struggling
to put together the necessary down payment to enter the housing market.
Low and zero down payment loans were widely available before the financial
crisis burst the housing bubble, with many financial experts placing at
least part of the blame on the availability of “easy money”
for homebuyers who, otherwise, would not qualify to purchase real estate.
However, in December of 2014, Fannie Mae and Freddie Mac, both quasi-governmental
mortgage institutions, introduced 3% low down payment programs designed
to offer qualified first-time buyers the opportunity to own a home. The
availability of these loans exploded, as major banks and national lenders
jumped at the chance to provide expanded mortgage products backed by the
The Freddie program, known as the Home Possible Advantage, soon morphed
into an ultra-low down payment program as lenders began offering a loan
product that essentially dropped the required borrower contribution to
1 percent. The 97% loan-to-value product was available for both purchase
and refinance mortgages, but was extremely popular among new home-buyers
seeking a path to home ownership.
National lenders began using the program guidelines to create a product
that lowered the borrower contribution to only 1% of the property’s
value. By paying 2% towards the down payment with a lender concession,
lenders were able to grant loans to individuals who qualified under Freddie’s
credit and income guidelines but who did not have the required 3 percent
cash needed to close the loan.
Still, other lenders took it a step further, designing programs that provided
a non-repayable grant to homebuyers which allowed them to have 3% equity
at closing without putting up any cash towards a down payment. Movement
Mortgage rolled out the program in June of this year, marketing it as
a zero down payment program for first-time homebuyers that carried no
second lien or additional promissory note.
Known as the Movement Assistance Program, the loan product utilized Freddie
Mac’s 97% LTV program to offer a path to homeownership for qualified
borrowers with a conventional 30-year fixed mortgage. In order to qualify,
homebuyers had to meet certain income, salary, and credit criteria.
This new low down program, along with others, has spurred an uptick in
loan applications among low to moderate income homebuyers who qualified
for the program but lacked the required down payment amidst rising home prices.
Although Freddie is pulling the plug on their 3% down program, some lenders
have indicated they will continue to offer the program to their broker
channels. Demand from homebuyers and brokers nationwide have prompted
some national lenders and banks to continue allocating funds for the program.
In the announcement from Freddie Mac, the mortgage backer stated, “We
are revising our 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. 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
Some lenders participating in the program scoffed at the statement, touting
low and zero down payment options offered by Veteran Affairs as an example
of a successful loan product that provides homeownership opportunities
to low and moderate income buyers, without mortgage insurance.
Regardless, the announcement makes it clear that lenders must stop offering
Freddie Mac sponsored loans with a less than 3% down payment by November 1, 2017.