Mortgages That Attract Homebuyers

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Do great rates and great service fail to impress you? Well you are not alone. We are in a time where you need to find out who can create value with their services and ideas. And what I mean by value is, attracting customers. A good number of investors plan to sell their property at some point and awareness of loan programs can help your potential sell.

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Here are a few loans of value over the last few years:

  • 100% purchase, non-owner, stated income, interest only
  • 1% pay option ARM
  • 100% cash out refinance
  • 100% Jumbo Loans

There is great debate on whether these loans are good loans, but few can argue these loan did attract customers for Realtors, Builders, and Mortgage Companies.

What are the next generation of loans to attract customers?

  • 3-2-1 buy-down
  • PITI Abatement
  • FHA/VA
  • My Community
  • Credit Repair

One might say that 2008 is the year of government backed mortgages. All the loans high lighted above are directly tied to the government through Fannie Mae, Freddie Mac or FHA/VA. Unfortunately the line is drawn right at $417,000 and some high cost areas have limits as high as $729,750.

3-2-1 Buydown
Sellers and Builders can use a temporary 3-2-1 and 2-1 interest-rate buy-downs as a sales incentive. In a 3-2-1 buy-down, the interest rate is reduced by 3 percent the first year, 2 percent the second year, and 1 percent the third year. A 2-1 buy-down lasts for two years, with a 2 percent reduction the first year and a 1 percent the second.

The 3-2-1 Mortgage Buydown

  • This is a 30-year fully amortized mortgage.
  • The interest rate increases 1% every year for the first three years.
  • Then the interest rate is fixed for the remaining term.

Here is how it works. Your loan balance is $375,000 and the interest rate is fixed at 6.5% for 30 years. The seller incentive could buy down the interest rate by paying a lump sum of $16,764.

  1. First-year interest rate is 3.5%, payable $1,684 per month.
  2. Second-year interest rate is 4.5%, payable $1,900 per month.
  3. Third-year interest rate is 5.5%, payable $2,129 per month.
  4. Years four through 30, interest rate is 6.5%, payable $2,370 per month.
  • First-year savings (as compared to $2,370 per month) is $686 per month or $8236.
  • Second-year savings (as compared to $2,370 per month) is $470 per month or $5642.
  • Third-year savings (as compared to $2,370 per month) is $241 per month or $2,892.

Add up the annual savings: $8,236 + $5,642 + $2,892 = $16,770. Therefore, it costs $16,764 to buy down the interest rate and payments for three full years. It costs approximately 4.5% of the loan amount to buydown.

Benefits of 3-2-1 Mortgage Buydown

  • The borrower qualifies for this loan at the 3.5% interest rate and payment amount of $1,684 versus the real rate of 6.5% and the payment of $2,370.
  • Instead of the payment jumping all at once, it goes up in smaller increments, about $200 each year, for the first three years.
  • It keeps payments low for 36 months for borrowers whose income is expected to later increase. Perhaps a spouse is returning to work after a hiatus or a person expects to graduate and land a higher paying job with that newly earned degree.

The 2-1 Buydown Mortgage

  • This is a 30-year fully amortized mortgage.
  • The interest rate increases 1% every year for the first two years.
  • Then the interest rate is fixed for the remaining term.

Here is how it works. Say your loan balance is $350,000 and the interest rate is fixed at 6.5% for 30 years. The seller’s incentive could buy down the interest rate by paying a lump sum of $8,063.

  1. First-year interest rate is 4.5%, payable $1,773 per month.
  2. Second-year interest rate is 5.5%, payable $1,987 per month.
  3. Years three through 30, interest rate is 6.5%, payable $2,212 per month.
  • First-year savings (as compared to $2,212 per month) is $439 per month or $5,268.
  • Second-year savings (as compared to $2,212 per month) is $225 per month or $2,700.

Add up the annual savings: $5,268 + $2,700 = $7,968. Therefore, it costs $7,968 to buy down the interest rate and payments for two full years.

This loan program can help more individuals qualify from and income documentation stand point.

PITI Abatement
What is PITI Abatement?

  • An incentive to the buyer to have the first 6 months of the mortgage paid by the seller.
  • PITI Abatement program is a product designed specifically for home-buyers. You can give a 6% Seller Contribution that can be used for Principle, Interest , Taxes and Insurance payments.

What are the General Guidelines?

  • Loan amounts up to $417,000
  • Up to 100% of the purchase price (5% reduction for declining markets)
  • Minimum score of 575
  • Fixed Rates and ARMs
  • Interest Only is available
  • Income limitations may apply
  • Closing costs can be paid by seller too
  • No prepay penalty

What is the Realtor marketing element?

  • 6 MONTHS PAID!
  • BUY THIS HOME AND I WILL PAY YOUR FIRST 6 PAYMENTS
  • 6 MONTH PAID MORTGAGE INCENTIVE
  • BUY MY HOME AND I PAY CLOSING COST AND 6 PAYMENTS

FHA Loans

FHA loans have been helping people become homeowners since 1934. How do we do it? The Federal Housing Administration (FHA) – which is part of HUD – insures the loan, so your lender can offer you a better deal.

  • Low down payments
  • Low closing costs
  • Easy credit qualifying

Benefits for your buyer·
Your down payment can be as low as 3% of the purchase price, and most of your closing costs and fees can be included in the loan. Available on 1-4 unit properties.

FHA has a loan that allows you to buy a home, fix it up, and include all the costs in one loan. Or, if you own a home that you want to re-model or repair, you can refinance what you owe and add the cost of repairs – all in one loan. Sellers and investors should be aware that FHA requires 90 days of season ownership of a seller in orders for a buyer to use a FHA loan.

What is the Realtor marketing element?

  • FHA can provide 100% Financing when combined with gift, grant or down payment assistance program
  • One loan with low fixed rate

      My Community Mortgage

      What is My Community Mortgage?

    • A conforming affordable housing program offering high loan-to-value/combined loan-to-value financing for income-eligible borrowers
    • Government backed mortgage program

    What are the General Guidelines?

    • Loan amounts up to $417,000
    • Up to 100% of the purchase price (5% reduction for declining markets)
    • Minimum score of 575
    • Fixed Rates and ARMs
    • Interest Only is available
    • Income limitations may apply
    • Closing costs can be paid by seller too
    • No prepay penalty
    • Allows “roommate rent” for income qualification

    What is the Realtor marketing element?

    • Automated underwriting = more approvals
    • Government backed loans available
    • Let us pay your closing costs

    Having all the tools to properly sell your property can be critical.

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7 Comments

  1. KC Investments on

    There is still plenty of variety, from what I see, for those with acceptable credit. Thanks for the update on the payment abatement. I may use that one.

  2. Troy,
    You’ve got the knowledge. I am finding too many mortgage brokers who are ready to say NO before they even look carefully at the situation. They do not seem to try to figure out the right product. Financing is where it is in today’s market. The real estate investor who connects to the right financing for his client is the one that is going to make it. Can you originate loans in Georgia?

  3. I like the current loans that we had 100% stated income…all they shoudl have done with those was rasie the crdit score, reserves requirements, and down payment of 10% versus cutting it out entirely.. I guess the sub-prime folks really hurt the ALT-A market. plus the ALT-A market was too lenient as well. whadda ya’ do go get a true lenders. the next generation sounds good too especially the buy downs…

  4. Very informative post. Stated loans are going to have to make some kind of come back. There are too many self-employed people out there that get to write off everyday bills, but really make the same amount or more money than the employed person. After write offs its hard for many self-employed to qualify for a loan.

    FHA loans are back! We’re seeing FHA loans in Oreogn on a regular basis. Its the almost the only way for first time home buyers.

  5. I know a lot of people who have got into trouble because they are in the wrong loan. The loan officers need to educate people like you are Troy.

    The 100% financing and the ARM’S have been destroying people all over the country. The stated loans are great, but once again those are for certain people.

    Thanks for this post it was very enlightening.

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