Want a Lower Payment and a Lower Rate Below Market…A 2-1 Buydown May be the Trick!

Want a Lower Payment and a Lower Rate Below Market…A 2-1 Buydown May be the Trick!…(Read Below for More Info)

 

What is a 2-1 Buydown?

A Buydown temporarily reduces the mortgage payment for the borrower. This happens because the seller offers a credit that pays the difference between the full P&I payment and the reduced P&I payment. The seller only needs to provide the credit and the lender handles supplementing the payment. So, it’s a seller credit used in a different way!

Why would a seller want to give this credit to the buyer?

A Buydown is paid for by the seller instead of the traditional lowering of the sales price when a listing doesn’t sell.  This potentially attracts more buyers because they get a much lower rate and payment for the first 2 years.  It also provides a lower payment helps buyers ease into their new home given all the new expenses they may have.  It also allows them to refinance when rates drop.

This also allows the seller to maybe not have to lower the list price.  This keeps home values as high as possible!  Since this is also a cost to sell the property then the sellers potentially get a tax break by lowering any capital gains (of course sellers should always contact their tax advisor on this).

You can also have a situation where the list price is fine and the sellers don’t need to lower it or give a credit to the buyers.  So then the buyers can counter to increase the sales price to cover the buydown subsidy and then have the sellers give that buydown subsidy!  Sellers get the same net sales price and of course the buyers are getting a much lower payment on their first 2 years!  Of course to do this the property has to appraise for the higher purchase price.  The buyers have to have the extra couple thousand for the down payment because of the slightly higher purchase price in order for this scenario to work.

Basically this is the borrower “financing” their buydown with the higher purchase price in order to get the seller to give the credit to fund the buydown!

Here Is an Example for Educational Purposes Only:

Interest Rate is 6.50%       Loan Amount is $715,000

P&I at $715,000 with a rate of 6.50% is equal to $4519.29/month

If a Seller credits the buyer with a subsidy, this amount can be applied to the buydown and reduce the 1st, 2nd or 3rd year payment, depending on the subsidy amount.

Let’s say a seller agrees to supplement the payment difference for years one and two.

The first-year payment for the borrower would be a rate of 4.50%.  The second-year payment for the borrower would be a rate of 5.50%.  Years 3-30 would be the normal rate of 6.50%.

Year One@ 4.50% = $3622.80 – P&I/Month

Year Two@ 5.50% = $4059.69 – P&I/Month

  • Keep in mind that the borrower still has to qualify at the NOTE RATE and not the buydown rate so in this scenario the borrower qualifies at the note rate of 6.50%
  • In this scenario with the 1st year rate being 4.50% and the 2nd year rate at 5.50% then this means their average rate for the first 2 years is at 5.00% which is still 1.50% LOWER than the current market rate!!

Seller Subsidy:

The difference between the Normal Payment of $4519.29 and Yr. One of $3622.80 is $896.49/Month.

The difference between the Normal Payment of $4519.29 and Yr. Two of $4059.69 is $459.60/Month.

If the Seller offers a subsidy of $896.49 x 12 = $10,757.88 (for 1st year) plus $459.60 x 12 = $5515.20 (for 2nd year) they would offer the borrower a total subsidy of $16,273.08 which would pay for the payment difference the first two years.

This strategy helps a homebuyer ease into their house payment and frees up funds for other things that would have normally gone to a house payment. NOTE: Seller credit cannot exceed maximum seller contribution for program selected.

 

For More Info, please contact me.

Best Regards,

Rob McCarthy

Senior Mortgage Advisor

www.101Loan.com

408-377-4123 o  650-465-8957 c   408-608-1921 f

101 Loan – 6090 Hellyer Avenue #100, San Jose, CA 95138

CA DRE #01165697  NMLS #121019

Products/Services/Accolades:

  1. Residential Financing for Purchases and Refinances on 1 to 4 unit properties.
  2. Reverse Mortgage Financing to include Conforming, Jumbo, HELOC Jumbo’s.
  3. Commercial & SBA Financing to include Multifamily, Office, Retail and Light Industrial.
  4. Access to over 50 banks with over 200 “Five Star” Reviews on Yelp, Google, Facebook and Linkedin.

Note: Interest rates and loan programs quoted are subject to change without notice or until locked and approved by lender.

Pre-Qualification vs Pre-Approval

The Pre‐Qualification…Your FIRST Step to Financing a Home

 

Because of the complexities of home financing and the numerous loan programs available to the general public, prequalifying must be done by a qualified loan agent (preferably a mortgage originator) in person, via e-mail or over the phone. The prequalification process is both objective and subjective. Lenders look at much more than just how much cash someone has or have much do they make. They look at the “overall picture”, for what lenders call compensating factors, of the applicant. These compensating factors include income, debt, assets, and credit. Consulting with a qualified loan agent, can help you determine which compensating factors should be emphasized to the lender.

Income

Employment and Bonus Income Commissions Income Self Employment Investment

Interest Income

Debt

Credit Card Debt Auto Loan Debt Student Loan Debt

Personal Lines of Credit

Assets

Savings and Checking Stocks, Mutuals, Bonds

401k, Pension and Stock Options

IRA’s, Profit Sharing

Credit

New Accounts Closed Accounts Derogatory Accounts Inquiries

and Liens

 

The Pre‐Approval…Solidifies Your Home Buying Position

Once an applicant is prequalified, the next step is the preapproval. This involves the lender verifying one’s income, debt, credit, and assets. This is done by sending the lender 30 days of pay-stubs,

  •   W-2’s and 1040’s for the last two years
  •   Bank statements on all assets for the last two months
  •   Verification of credit by credit report
  •   A copy of your driver’s license

 

Once the preapproval is done, the buyer strengthens their buying position. Now, buyers have a “walking credit card” to purchase a new home! Buyers should never start their home search without being preapproved. The preapproval is usually valid for 90 days (sometimes longer) as long as the applicant’s income, debt, assets, and credit have not worsened or rates have gone up or loan programs have been eliminated.

October 20, 2019

 

Ref: Prequalification for John and Jane Doe                                           (Prequalification Sample)

 

To whom it may concern,

 

Based on the information provided to me, the above referenced client qualifies for the following:

 

Max Purchase PriceDown PaymentLoan ProgramPITI PaymentType of Property
$875,00020%Fixed or Hybrid$4129/monthHome

 

Notes: The PITI payment above is based on principle, interest, taxes and insurance based on a monthly basis. Usually you only pay principle and interest on a monthly basis.

 

Tax Benefits

 

As you may know, once you purchase a home, you are entitled to the tax benefits associated with

home ownership. Below you will find the purchase prices as stated above, that provide the approximate tax write off, net tax benefit, and net effective PITI payment associated with owning versus renting.

 

Purchase PriceTax Write OffNet Tax BenefitNet Effective PITI Payment
$875,000$3308/month$793/month$3336/month

 

Notes: The above info can vary based on the actual rate, payment and household income of the borrower(s). For a more complete analysis of this benefit, please contact your CPA, tax planner or accountant.

 

Congratulations, you are now pre‐qualified. The next step is the pre‐approval process. To start this process, we will need to meet in person, and I will need you to bring the following with you:

  •   Copies of paystubs for the last 30 days.
  •   Copies of w‐2 and 1040’s for the last 2 years.
  •   Copies of bank statements for the last 2 months, for checking, savings, stock and 401k.
  •   Copy of driver’s license or passport.

 

Once you have put this list of items together, please contact me to schedule an appointment. Thank you for your time and interest.

 

Sincerely,

Rob McCarthy

Senior Mortgage Planner

October 20, 2019

 

(Prequalification sample) 

Ref:   Pre‐Approval for Home Financing

 

Dear John and Jane,

 

This letter is to inform you have been pre‐approved for the purchase price of $875,000.00 based on 20% down. Your credit, income, debt and assets have been reviewed and are satisfactory to the lender.

 

This pre‐approval is subject to the following conditions:

 

  • Review of preliminary title report from lender.
  • Review of appraisal of property per agreed contract price by lender
  • Review of purchase contract by lender

 

Should you have any questions, please feel free to call me. Thank you for your time. Sincerely,

Rob McCarthy

Senior Mortgage Planner

What We Do is Different!

Some lenders provide great rates but lack service. Some lenders provide great service but lack good rates. At 101 Loan, we provide both but when it comes to making an offer on your behalf, we go the extra mile to ensure your offer is the strongest possible in the eyes of the seller. This includes the following and something most banks, brokers or credit unions don’t offer: Read more