Sellers Concessions Can Be Used For Interest Rate Buydowns
This BLOG On Interest Rate Buydowns Was Updated March 5, 2017
Interest Rate Buydowns is a term used when borrowers pay POINTS to buying down interest rates. Borrowers with great credit and a good mortgage interest rate often can get even lower interest rates by paying points for even a lower mortgage interest rate. Mortgage rate buydowns is a great strategy to use if the homeowner intends on keeping the home for long term and not refinance in the near future.
To get the best possible interest rate on a home loan, borrowers need the following
- Credit scores of 740 FICO or higher
- 20% down payment
- Single Family Homes has the lowest interest rates followed by townhomes and condominiums
- Borrowers who purchase townhomes and condominiums have higher interest rates because they are considered riskier investments
Mortgage rate buydowns is done by borrowers paying points. One point is equivalent to 1.0% of the loan amount.
As an example, if the current market interest rate for a conforming conventional fixed rate mortgage loan is 4.5%, a borrower may get a 4.25% interest rate by paying 1% POINT, 4.0% rate by paying 1.5% POINTS, and 3.75% by paying 2.0% POINTS. This is just a case scenario example.
Interest Rate Buydowns with Sellers Concessions
Sellers concessions is when a home seller offers to pay for buyer’s closing costs. Borrowers can use sellers concessions to buy down mortgage interest rates.
Here are the allowable sellers concessions on home purchases
- FHA allows up to 6% sellers concessions
- VA allows up to 4% sellers concessions
- Fannie Mae and Freddie Mac allows 3% sellers concessions for owner occupant properties and 2% sellers concessions for investment homes
- Jumbo Mortgages allows up to 3% sellers concessions
- NON-QM Loans allows up to 6% sellers concessions
Sellers Concessions For Closing Costs And Buying Points
Sellers concessions can only be used for closing costs and not down payment on a home purchase.
Here are examples of closing costs on a home purchase
- Title charges
- Recording Fees
- Appraisal Fees
- Pre-Paids which are escrows for taxes and insurance
- Appraisal fees
- Attorney fees
- Inspection fees
- Homeowners insurance premium
- Mortgage insurance
Overages Of Sellers Concessions
It is always a good idea to ask for maximum sellers concessions. One important point borrowers need to keep in mind is that they cannot get a kickback from sellers concessions if they have sellers concessions overages . If there is overages in sellers concessions, the loan officer can use the overage in mortgage rate buydowns where the borrower can get a lower interest rate by paying points. Borrowers may want to pay more points to get much lower mortgage interest rates if they plan on not refinancing in the near future. There are closing costs every time a homeowner refinances their mortgage.
Cases Where Mortgage Rate Buydowns Is Necessary
There are instances where rate buydowns is necessary. Borrowers who go over the maximum debt to income ratio caps may need to have lower mortgage rates in order to meet the maximum DTI caps. This is often done with high DTI borrowers. Buying points to buy down interest rates may be an option to reduce borrower’s debt to income ratios along with other strategies such as paying down credit cards and other debt.