Effective immediately, Fannie Mae is allowing lenders to assist home buyers in paying their closing costs for GSE-backed mortgages. Fannie Mae sent a bulletin to lenders last week informing them about its new rules.
Here’s How it Works
Lenders can begin assisting borrowers with closing costs right away, but the amount of lender contributions cannot exceed the amount of the closing costs and pre-paid fees actually paid by the borrower.
The money must also be in the form of a gift, with no terms of repayment, and cannot be used toward the borrower’s down payment. The closing cost assistance must also come directly from the lender and cannot be passed to the lender from a third party, and cannot in any way affect the loan terms given the borrower receiving assistance.
Fannie Mae’s Chief Credit Officer for Single-Family Carlos Perez stated in the bulletin to lenders: “We’re making it easier for borrowers to purchase a home by allowing lenders to fund closing costs and prepaid fees.”
According to Fannie Mae, this program was already available on a limited trial basis to some lenders, but is now available to all lenders issuing GSE-backed loans. A similar program, in which lenders were allowed to assist home buyers by paying part of their down payments, was terminated by Fannie Mae last summer.
Why the Rules Changed
According to a release from HousingWire, the down payment assistance program raised some eyebrows at the Federal Housing Finance Agency (FHFA). That’s because some lenders appeared to be providing borrowers with less favorable loan terms, including higher interest rates, in exchange for the upfront proceeds toward their down payments.
Under such programs, lenders gave borrowers up to 2% of the home costs, leaving the borrower with the responsibility for only contributing the remaining 1%, for the total 3% down payment required to qualify for a Fannie Mae or Freddie Mac loan program. However, in exchange for the assistance, many borrowers received less favorable loan terms which would result in the borrower paying more over the life of the loan than what they received in down payment assistance, and in some cases they’d pay much more.
Fannie Mae suspended the down payment assistance programs, except in some cases where the down payment funds were a true gift and didn’t affect loan terms.
Acuity Real Estate Solutions
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