Who is up for free money? Everyone? There (obviously) isn’t any.

However, many snake oil lenders are pushing this loan program as good for the consumer (it’s NOT), and I’ll prove it to you with simple math.

Additionally, these loan programs don’t expand “buying power” as buyers MUST qualify at the fully indexed rate of 6.5%, not the starter rate of 4.5%

There’s a 3-point cost OR a “higher start rate,” and someone will foot the bill at COE.

Need proof? Google “Interest Rate Buydowns.”
It’s All About Lenders “Churning” Loans

Let me show you and your buyers how this buydown loan is “most often” structured and show it’s old to the public.

Whenever rates skyrocket, lenders consistently devise “gimmicks” to sell clients while padding their bottom line at the borrower’s expense.

Before the reforms of the Great Recession, the national lender’s weapon of choice was “neg -am” (negatively amortized) loans with prepay penalties.

National lenders are now hawking a “2-1 buydown”, falsely claiming buyers can more “easily qualify.” Fannie, Freddie, FHA, and VA don’t allow for that.

Before I illustrate the other negatives of this loan program:

Let’s do the Math – All Figures Rounded Off

Standard Fannie/Freddie Loan Type: 30-year fixed rate
Purchase Price $1 Mil —— Loan Amount $800k

Points: Zero… Interest Rate 6.5%. Monthly “PI” Payment $5050
 Annual “PI”: $60,600 Year
Total “PI” paid through 24 months for a
 Grand Total $ 121,200 with no points

-VS-

“Temporary Buy Down”
The start rate is 4.5%
30-year Loan 2/1 Buydown
Purchase Price $1 Mil Loan Amount $800k

Points Paid Year 1 is 16k

Year 1 Rate 4.5%.
Year 1 Monthly “PI” payment $4050
Year 1 Annual “PI”: $48,600
—————————–

Year 2 Rate 5.5%.
Year 2 Monthly “PI” payment $4540
Year 2 Annual “PI”: $54500
Total 24 months of  PI = $103,100

Points Paid in year “2” is $8k

Subtotal
Total Loan Fees after 2 years is  3 points =$24k
The Buy Down Program’s Total Monthly Payments + Points is = $127,100

The program’s cost to “someone” is $6k higher (over 24 months) compared to the Standard Freddie/Fannie loan.

Who Pays the 3 points and Other “Fun Facts”

1) This loan program is unavailable for second or “investment/non-owner-occupied” properties, and it cannot be used for a “cash out” refinance.

2)  The borrower has to qualify at the 6.5% note rate, NOT the 4.5% start rate.

Who Pays What!

Fannie Mae guidance states these Interested Party Contributions or IPCs may be paid for by the property seller, the borrower’s employer, the mortgage lender, the borrower or “other interested parties” (real estate agents or employers).

Can the buyer’s employer pay for the “buy down” ?

a) Yes. But it’s rare, and involves a relocation and/ or new employment contract of which I’ve seen 2, in 40 years.

Fannie MAY allow for Credits up to 6%,

b) Not since the 1990s has a lender allowed more than 3% for closing costs for any transaction from a seller or their agents.

c) In today’s interest rate market, lenders do not offer more than a 2% credit for closing costs.

In Closing
Shame Shame Shame

As an agent, you are often the buyer’s first point of contact for financing, so be prepared to look good. After you’ve verified my math, you will save an unwitting buyer $6,000 in just two years.

Copywrite © August, 2018 Daniel Dobbs MHM Mortgage /// All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the publisher, except in the case of brief quotations embodied in critical reviews and certain other noncommercial uses permitted by copyright law. For permission requests, write to the publisher, addressed “Attention: Daniel Dobbs, Author- VP-Broker Mutual Home Mortgage 265 S. Randolph #120 Brea, Ca. 92821 Cell: 949 250-3981 Dandobbs6@gmail.com NMLS #307631 BRE #00986886