Today I’m excited to share some valuable information that can help you guide your customers toward the best mortgage decisions in today’s changing market. We’ll explore temporary buydowns, permanent buydowns, and seller concessions vs price drop.
Mortgage lending, as you know, is all about numbers. And when it comes to buydowns, price drops/concessions you’re essentially shifting loan costs from one area to another. There’s no hidden catch, just strategic money movement. Understanding these options empowers you to advise your customers effectively.
Let’s consider a scenario:
- Purchase price: $425,000
- Down payment: 3% ($412,250 loan amount)
Temporary Buydowns: Seller or Buyer Paid vs Lender Paid
Both options below provide a 1% interest rate reduction for the first year. The key? The buydown funds are held in escrow and used to supplement monthly payments. If you refinance or sell, you get that money back!
- Seller/Buyer Paid Buydown: 7% interest rate with 1-0 buydown, costing $4,122.50.
- Lender Paid Buydown:7.4% interest rate with 1-0 buydown, rolling the $4,122.50 into the loan for a slightly higher rate.
When your customer is short on funds to close you can utilize a Lender Paid Buydown instead and shift the Seller Buydown funds to cover closing costs. The reason the Lender Paid Buydown is higher interest rate is because the lender is baking in the $4,122.50 into the loan which results in a slightly higher rate.
Permanent Buydowns: Buying Points
Here, you’re “buying” points to lower the interest rate.
- Seller/Buyer Paid Points: Reducing the rate from 7% to 6% costs around $9,106.06, with a 34-month break-even period.
Seller Concessions vs. Price Drop
Imagine a house listed for a while. The seller could drop the price by 3% or offer a 3% concession to the rate. Let’s compare:
- 3% Price Drop: New purchase price is $412,250 with a 3% down payment ($399,883 loan amount). Monthly principal and interest payment at 7% is $2,660.43.
- 3% Seller Concessions:Purchase price of $425,000, loan amount of $412,250, and interest rate of 5.79%. Monthly principal and interest payment is $2,416.26. This opens up the pool to more buyers who might not qualify for a slightly higher rate.
Seller Concession Limits:
It’s important to know the limits for seller contributions:
FHA Loans: 6% seller contribution
VA Loans: 4% seller contribution
Conventional Loans:
- Less than 10% down payment: 3% seller contribution
- 10-25% down payment: 6% seller contribution
- More than 25% down payment: 9% seller contribution
- Investment property: 2% seller contribution
Navigating buydowns and seller concessions can be complex, but understanding the numbers and options empowers you to advise your customers strategically. By considering payback periods, limits, and market dynamics, you can help them win big in today’s real estate landscape.
Remember, you’re a valuable resource for your clients. Use this information to guide them towards informed decisions and unlock their path to homeownership!