Buying Down Mortgage Rates

Buying Down Mortgage Rates With Discount Points

Gustan Cho Associates are mortgage brokers licensed in 48 states

This guide covers buying down mortgage rates with discount points to lower mortgage rates. Today’s mortgage rates are at historic lows. Many homeowners who refinance at these historically low rates do not plan on refinancing shortly. Therefore, they will pay a premium to buy down mortgage rates even lower than what par rates are today. Alex Carlucci explains buying down mortgage rates with discount points:

Borrowers buying down mortgage rates with discount points can do so with seller concession. There are instances borrowers need to buy down rates with seller concession to lower rates so  they can meet the minimum debt-to-income ratio.

There are other reasons for buying down rates with paying discount points. One of the reasons is due to loan-level pricing adjustments. Borrowers with a high debt-to-income ratio may need to buy down the rate to qualify due to the high debt-to-income ratio. This article will discuss why borrowers buy down mortgage rates with discount points.

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Reasons To Buying Down Mortgage Rates

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There are multiple reasons why borrowers need to buy down mortgage rates. The primary reason is due to getting a lower rate. Buying down mortgage rates is a good idea if you plan on not refinancing for a while. Buying down rates is not recommended on a starter home. A homeowner plans on upgrading in five years or sooner.

Other reasons for buying down rates are for borrowers with lower credit scores. Government and conventional loans have a maximum rate cap. Lenders cannot charge beyond a certain rate. However, due to the loan level pricing adjustments, discount points are charged for lower credit score borrowers.

Debt-to-income ratio issues are one of the biggest problems mortgage borrowers encounter. Many with great credit and credit scores run into debt-to-income ratio issues. All mortgage programs have debt-to-income ratio requirements. However, each lender can have higher standards on debt-to-income ratios than those mandated by FHA, VA, USDA, Fannie Mae, and Freddie Mac. The additional debt-to-income ratio guidelines required by individual lenders are called lender overlays.

Buying Down Mortgage Rates Solution To High Debt-To-Income Ratios

A mortgage loan borrower can lower his mortgage rates by paying points. Seller concessions can be used to buy points in buying down mortgage rates. Buying down mortgage rates by paying points is often used for borrowers with high debt-to-income ratios. The maximum front-end debt-to-income ratio cap for FHA-insured mortgage loans is 46.9%. The maximum back-end debt-to-income ratio for FHA-insured mortgage loans is 56.9%.

Debt-To-Income Ratios

Debt-to-income ratios are the total monthly payments a mortgage loan borrower has divided by their gross monthly income. The front debt-to-income ratio is the total housing expenses divided by the gross monthly income.

Housing expenses include the principal, interest, taxes, mortgage insurance premium, homeowners insurance, and the homeowner’s association dues, if applicable.

The back-end debt-to-income ratio is the sum of the total housing expenses  Plus any other monthly minimum payments such as auto loans, minimum student loan payments, minimum credit card payments, and other installment minimum payments divided by the gross monthly income.

Buying Down Mortgage Rates With Discount Points

How to Buy Mortgage Interest Using Points

If the debt-to-income ratios are higher than the maximum allowed, there are still several options for borrowers to get a residential mortgage loan approval. The first option is to pay down all credit cards so there are no minimum credit card payments. If borrowers’ debt-to-income ratios still exceed the maximum allowed, buying down mortgage rates by paying points is a great option. Buying down mortgage rates is expensive.

Options For Getting Lower Mortgage Rates

If you want a mortgage rate of 3.5%, you can get this rate by buying down mortgage rates by paying 3 points. For example, let’s take a case scenario. Let’s say current FHA-insured mortgage rates are at 4.25%. One discount point is 1% of the loan balance. 3 points on a $200,000 mortgage loan is $6,000. It is a one-time fee to buy down the rate. But many mortgage loan borrowers need to do it to get a lower rate to lower their monthly mortgage payments to qualify for a mortgage loan.. So it does not exceed the maximum debt-to-income ratio caps mandated by FHA mortgage lending guidelines.

Alternative To Buying Down Mortgage Rates To Get Lower Rates

An alternative to buying down mortgage rates to get lower interest rates so the borrower’s monthly mortgage payments are reduced to qualify for debt-to-income ratio requirements is choosing an FHA adjustable mortgage rate mortgage loan program. ARMs have lower mortgage rates than 30-year fixed-rate mortgage loans. There are 3/1 ARM, 5/1 ARM, and 7/1 ARM mortgage loan products. Adjustable-rate mortgages have much lower mortgage rates than 30-year fixed-rate mortgage loans. However, most lenders will not qualify at the current ARM mortgage rate but will add 2% for qualifying purposes. Due to this, changing to an adjustable-rate mortgage at a lower rate will not help lower debt-to-income ratios.

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Seller Concessions To Use To Buy Down Rates

Homebuyers can use sellers’ concessions to buy down mortgage rates. The Federal Housing Administration (FHA) allows up to a 6% seller concession from the seller toward a buyer’s closing costs. USDA allows 6% seller concessions. VA Loans allow a 4% seller concession. Fannie Mae and Freddie Mac allow 3% seller concessions on owner-occupant properties and 2% on investment properties. Buying down mortgage rates requires the buyer to pay points. Points are part of closing costs, so seller concessions can be used towards paying points in buying down mortgage rates. Home Buyers who need to qualify for a mortgage with high debt-to-income ratios with a direct lender with no overlays can contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at alex@gustancho.com. We are available evenings, weekends, and holidays seven days a week.

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