Making Mortgages More "Affordable" for Millennials

Aug 6, 2018

The Level 1 article in the August SMI newsletter touches on the topic of making an entire mortgage down payment with money received as a gift. Making a down payment with gift money is an increasingly common practice, at least in certain parts of the country.

From a recent post by popular investing blogger Josh Brown at The Reformed Broker:

"How do you start a life these days?" the old timer was saying at Bagel Plaza the other morning in my hometown of Merrick, New York. "You can’t afford to live anywhere."

He’s talking about his daughter and son-in-law, whom he’s in the process of helping buy their first home. The houses are now turning over rapidly in my neighborhood. You have to show up with cash in a lot of cases.... People in their late 20s or early 30s are being put in a position where they literally can’t do this on their own.... The story I hear over and over again is the parents helping out...

It used to be that if you wanted to use gift money for an entire down payment you had to get an FHA (i.e., government-insured) loan, rather than a conventional loan (i.e., one insured via the private marketplace). Conventional lenders and their insurers wanted to see borrowers put down money from their savings. As we noted in the Level 1 article, in most cases involving conventional loans "only a portion of the down payment may be from a gift." But we’ve learned that limitation no longer applies for most conventional loans.

An SMI Member who is in the mortgage business informs us that the gift-as-down-payment restriction has been eased under guidelines issued by both Fannie Mae and Freddie Mac, the two big government-sponsored (but ostensibly private) enterprises that buy mortgages from lenders. If a borrower is buying a "principal residence," Fannie Mae says "a minimum borrower contribution from the borrower’s own funds is not required. All funds needed to complete the transaction can come from a gift." (Note: This doesn’t apply if the residence has two or more units.)

More from Fannie Mae:

A gift can be provided by:

a relative, defined as the borrower’s spouse, child, or other dependent, or by any other individual who is related to the borrower by blood, marriage, adoption, or legal guardianship; or a fiancé, fiancée, or domestic partner.

The donor may not be, or have any affiliation with, the builder, the developer, the real estate agent, or any other interested party to the transaction....

Gifts must be evidenced by a letter signed by the donor, called a gift letter. The gift letter must:

  • specify the dollar amount of the gift;

  • specify the date the funds were transferred;

  • include the donor’s statement that no repayment is expected; and

  • indicate the donor’s name, address, telephone number, and relationship to the borrower.

So the bottom line here is that the mortgage industry, prompted by Fannie Mae and Freddie Mac, has made it easier for parents and grandparents (and others) to help young people make a down payment on a conventional mortgage.

Other policies aimed at "affordability"

Changing the gift-related down-payment policy is one of several tools Fannie Mae is using to encourage young people to buy houses. The website Mortgage Orb reports on multiple programs developed by the mortgage-purchasing giant, some of them rather unusual:

Fannie Mae recently partnered with SoFi to enable the parents of millennials with high student loan debt to refinance that debt using their home [emphasis added].... [T]he Student Loan Payoff ReFi program gives homeowners the ability to refinance their mortgage and pay down the balance of an existing student loan at the same time. Thus, this cash-out refinance student loan payoff plan helps more millennials qualify for mortgages....

Fannie Mae [also has] adjusted its requirements to allow certain qualifying buyers with high student loan debt to have that debt not included in underwriting provided that the borrower has an income-bashed [sic] repayment plan....

In yet a bigger and bolder move, Fannie Mae recently adjusted its DTI [debt-to-income] threshold from 45% to 50% for certain borrowers with student loan debt, provided there are certain "compensating factors."...

In what many might consider a highly unusual pilot program, Fannie Mae also recently partnered with crowdfunding technology provider CMG Financial, which in October launched HomeFundMe, an online platform that allows borrowers to crowdfund the down payment on a home purchase without fees....

Fannie Mae also recently announced a unique pilot program in Seattle with Loftium and mortgage lender Umpqua that enables millennials to rent out rooms in their new homes via Airbnb and have the rent apply toward a down payment.

And as HousingWire reported a few months ago, "Fannie Mae...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" (emphasis added).

You can decide for yourself it these approaches are helpful or dangerous (or some combination thereof). But given that the last financial crisis was related to a housing collapse precipitated by defaults on many mortgages that were not "affordable" after all, it would be understandable if some of these new attempts at affordability seem a bit unsettling.

It’s great if a young couple can buy a house. But how much help toward "affordability" is too much? "Join the Discussion" below.

Written by

Joseph Slife

Joseph Slife

Joseph Slife has been a news writer for the Associated Press, a college instructor, and a radio host. He and his wife Joye have three grown sons.