While it’s not quite the same as the down payment assistance that the government-sponsored enterprises used to allow, lenders now have a new way to help borrowers buy a home – closing cost assistance.
Fannie Mae announced this week that it will now allow lenders to contribute to borrowers’ closing costs, as long as the money is a gift and is not used towards a borrower’s down payment.
Over the last few years, Freddie Mac on a larger scale, and Fannie Mae on a smaller scale, allowed lenders to gift money to borrowers that could be used on their down payment on a 3% down mortgage.
Under the programs, lenders would “grant” 2% of the down payment to the borrower. Add that to the borrower’s 1% contribution, and you would have the 3% needed to qualify for the Fannie and Freddie programs.
These programs fell out of favor after some lenders began rolling the “grants” back into the loans themselves in the form of premium pricing, wherein the lender would charge a higher interest rate in exchange for the down payment assistance.
That raised some flags with the Federal Housing Finance Agency, which eventually led to Freddie ending the program last summer.
At the time, the FHFA told HousingWire that it was monitoring the situation and had some concerns about the risks associated with charging certain borrowers higher interest rates in exchange for down payment assistance.
The FHFA told HousingWire that it was concerned that those borrowers might end up paying more over the life of the mortgage than what the lender provided in assistance.
So, the down payment assistance programs ended, at least in terms of the 2% coming directly from the lender and needing to be repaid.
Recently, HousingWire exclusively reported that United Wholesale Mortgage would be ending its 1% down program, in which the lender was gifting the entire 2% of the down payment to the borrower and not pricing the gift into the loan.
But now, lenders who sell their loans to Fannie Mae can begin offering closing cost assistance to borrowers, under certain circumstances.
According to an announcement sent this week by Fannie Mae to lenders, the money must be in the form of a gift and cannot be subject to any sort of repayment requirement.
Additionally, the money must not be used to fund any portion of the borrower’s down payment. The money can be used for closing costs and fees only.
Fannie Mae also said that there is no limit on the amount a lender can give to a borrower, just as long as it does not exceed the total closing cost amount.
“We’re making it easier for borrowers to purchase a home by allowing lenders to fund closing costs and prepaid fees,” Fannie Mae Chief Credit Officer for Single-Family Carlos Perez said in a letter to lenders.
“While there is no limit to the amount of the lender-sourced contributions, the funds cannot be used toward a down payment, cannot exceed the total closing costs, and should not be subject to any form of repayment agreement,” Perez added.
Additionally, Fannie Mae notes in its lender bulletin that the closing cost assistance must come directly from the lender and cannot be passed to the lender from a third party.
And now, for the fine print, taken from Fannie’s lender bulletin:
The amount of the lender contribution should not exceed the amount of borrower-paid closing costs and prepaid fees. Otherwise, the amount of the contribution is not limited except when the lender is an interested party to a purchase transaction as defined in B3-4.1-02, Interested Party Contributions, and in that case, the interested party contribution (IPC) policy applies. Any excess lender credit required to be returned to the borrower in accordance with applicable regulatory requirements is considered an overpayment of fees and charges, and may be applied as a principal curtailment or returned in cash to the borrower.
A spokesperson for Fannie Mae told HousingWire that the program was previously available on a limited trial basis to certain lenders. But now, the GSE is making the option available to all lenders.
According to Fannie Mae, lenders can begin contributing to borrowers’ closing costs under those specified conditions immediately. The change goes into effect now.