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By G. Steven Bray
Recent surveys indicate that saving for a down payment is one the biggest hurdles to homeownership. With rising home prices, that hurdle may seem like a moving target. Some homebuyers are turning to down payment assistance programs for help.
Well, Freddie Mac just threw cold water on one popular method of funding these programs. It’s called differential rate pricing or premium pricing. The lender provides assistance equal to 3 to 5% of the loan amount in exchange for a substantially higher interest rate. As Freddie correctly discerned, the result is a no down payment, higher-rate mortgage, which violates current conventional loan guidelines. As of 11/1, Freddie will disallow its use with low down payment loan programs.
I have not heard if Fannie Mae is planning a similar prohibition, but given that both agencies are owned by the government, one has to wonder. FHA officials have been squabbling among themselves for over a year about the legality of premium priced programs. For now, they are permitted.
If you’re struggling to find the funds for a down payment, I suggest you check out my Can I Qualify with limited savings videos for ideas. You also may want to check with your city or county for down payment assistance that doesn’t use premium pricing. Keep in mind that most of these programs have income and purchase price limits, and you may have to repay some or all of the assistance if you don’t stay in the home for 5 to 10 years.