Buydowns become critical for buyers to beat the market

It’s a terrible time for home buyers. Mortgage rates for a 30-year fixed rate loan hover around 7% levels and still high house prices are reducing purchasing power.

What Helped Erica Davis, Loan Originator at Guild loan, in the current high rate environment there is a temporary seller financed 2-1 rate buyout. Taking advantage of the temporary 2-1 rate buyback, Davis was able to lower her 7.25% mortgage rate by 2% in the first year and 1.5% in the second year.

The seller, who struggled to find a buyer in a chilled housing market, agreed to deposit a lump sum into an escrow account at closing, ultimately saving Davis $6,900 in monthly payments over the first two years.

“I will absolutely refinance when rates come down, which is why I’ve decided on a 2-1 rate buyback,” Davis said. “It helps to have that lower payout and the extra cash flow gives you a little more flexibility so you’re not so tight on budget.”

In a high rate environment, lenders are calling temporary rate buy-back a winning strategy for both sellers and buyers, when used appropriately. While homeowners are discouraged from giving up their low mortgage rates and moving, buyers are still out there and on the bright side for buyers is some muted competition compared to the sizzling housing market of the last couple of years.

“As rates rise and home prices correct in 2023, sellers will want to take advantage of improving their chances of doing business with an enthusiastic buyer who can get a below-market rate with seller participation,” Jeff Miller, vice president of Pacific Northwest at Churchill mortgageShe said.

Sellers, including homebuilders, can also gain a competitive advantage by being flexible in terms of offering credit or concessions, such as temporary rate buybacks, an attractive option that offers borrowers a reprieve to combat the affordability challenge of the lodgings.

“If the process is properly explained to both parties, sellers and buyers will enjoy seeing each other win and achieve each party’s goals,” Miller said. “It gives the buyer and seller a sense of beating the common enemy, ‘the market’, and playing the system.”

Lenders seize the opportunity for lost volume

With the rapidly shrinking mortgage market (some experts believe it could shrink to just $1.3 trillion in origination volume in 2023), several lenders have rolled out the option of temporary buybacks and joined in providing lenders. buyers to help compensate for lost origination volume.

United Mortgage Wholesale, the largest mortgage lender in the country, recently expanded its buyback options to include a lender-paid version, in addition to the seller-paid version. The wholesaler was among the first to offer temporary 2-1 and 1-0 buybacks, which aren’t new products but haven’t been used much in the last decade.

“I will absolutely refinance when rates come down, which is why I’ve decided on a 2-1 rate buyback.”

Erica Davis, Guild mortgage broker and home buyer

Rocket mortgage also launched a lender-financed 1-0 rate buyback, dubbed the “inflation buster” program, as well as a seller- or realtor-financed 1-0 rate buyback from its wholesale arm Rocket Pro TPO.

“Temporary rate buyouts are a great tool for brokers and real estate agents in an environment of rising rates,” said a UWM spokesperson.

The Michigan lender said it was “getting a lot of traction” but said it was unable to provide data given that temporary rate buyback options for borrowers are “so new.”

loanDepot, Guild loan And NewRez they are also among the lenders that cover the difference in mortgage payments or offer the option of temporary buybacks at a rate paid by a seller or builder.

From an investor’s perspective, a 30-year fixed-rate conventional loan or a locked-in mortgage with a temporary rate surrender will carry the same risk. The payment the lender receives is always the same, as the seller funds the escrow account to make up the difference for the lender.

Fannie Mae And Freddy Mac require the lender selling it to underwrite the borrower at the undiscounted interest rate, so there are no worries about teaser mortgages being reset to higher rates,” said Peter Idziak, senior associate attorney at Polunsky Beitel Green.

Not a one-size-fits-all scenario

Depending on the market, LOs say they have seen only 10% of their total loans close with temporary rate cuts, or as high as 60%.

It is not a one-size-fits-all scenario and depends on the situation of the borrowers.

The borrowers who would benefit from a temporary rate buy-back are those who are entering the market and plan to stay on the property for two to three years before moving to a different type of property, Trudy Kelly, a senior loan officer at Churchill mortgageShe said.

Borrowers intending to have the property long-term will have to bear the higher rate when the temporary redemption ends and the rate reverts to the original quoted rate.

Fannie Mae And Freddy Mac require the lender selling it to underwrite the borrower at the undiscounted note rate, so there are no worries about teaser mortgages reverting to higher rates. “

Peter Idziak, Senior Associate Attorney at Polunsky Beitel Green

“If for some reason interest rates don’t come down within 24 months of closing, then they won’t have that ability to refinance it at a lower rate and… reduce the payment over the life of the loan,” Kelly said.

Borrowers with sufficient liquidity, for example, might consider an all-cash offer, put more down payment to reduce the mortgage amount, or choose a permanent rate surrender. Often called “buy points,” the borrower could reduce the interest rate, resulting in greater savings over the life of the loan.

For buyers who could move out of the house within 10 years, an adjustable rate mortgage (ARM) – which offers a low fixed rate for typically 5, 7 or 10 years, after which the rate resets to current market rates – could be a option, depending on how attractive the ARM rates are.

A 5/1 ARM on Nov. 22 was 6.24% while a 30-year fixed rate was 6.64%, according to Mortgage news every day.

Thinking outside the box

Every buyer has unique financial circumstances, which is why educating LOs about temporary rate cuts has become crucial for lenders, Blake Bianchi, founder and CEO of future mortgage, She said. The buy-back option isn’t a new concept, but for loan agents who have joined the refi boom, it’s a new concept they need to learn.

“As an LO, you should be aware of temporary rate cuts because it’s making up the majority of loans now in this market,” Bianchi said. Bianchi, who leads a mortgage brokerage of 12 loan officers, expects about 60% of their loans in November will close in a temporary rate cut, up from 50% last month.

“If for some reason interest rates don’t come down within 24 months of closing, then they won’t have that ability to refinance it at a lower rate and… reduce your payment over the life of the loan.”

Trudy Kelly, senior loan officer at Churchill Mortgage

After seeing purchase deals close with seller credits and builders offering concessions, Bianchi saw potential benefits in offering temporary rate buy-back options for borrowers. It’s been about three months since Bianchi began training LOs on what a temporary rate mark and a permanent rate mark (purchase points) are to help them better educate customers.

“We don’t want LOs to convince customers that rates will be low for three years, for example, and that customers won’t be able to afford payments after that. It takes education from LOs to clients, as well as setting realistic expectations,” she said.

It’s about getting creative and thinking about whether there is negotiating power for borrowers, Kelly of Churchill Mortgage said about helping clients find ways to lower their monthly mortgage payments.

Kelly recently helped a client navigate a scenario where he gets a $15,000 concession to the seller to fund his temporary 1-0 rate redemption rather than asking the seller to lower the quote price. Her client closed the house and will save $341 each month for the first year.

“There are some who have hit the pause button because they are priced out of the market with rising interest rates. There are deadlocks from one neighborhood to the next, which has forced us to think outside the box for our clients,” Kelly said.

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