Buy down question

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  • #38655

    CANDRAnATL
    Member

    I have a buy down question. I want to contribute the maximum of 7 points to buy down. I am over 100% the median income for the area so I don’t qualify for any matching. Am I able to use my full 7 points towards the interest rate? I read some things about the formula where I can contribute 7 points but only 4 go towards the buy down and the remaining three points have to go towards principal reduction. Basically I want to buy the current 3.375 to 1.625 with my own funds and not have anything go towards a principal reduction. I am with Bank of America. Thanks everyone!

    #38658

    TTrumble
    Member

    Hello CANDRAnATL,

    The entire seven points does not go directly to interest rate reduction. Here are the guidelines for BOA:

    NACA Interest Rate Buy Down, HOEPA limitations and Participating Lender Grants

    NACA Interest Rate Buy Down:
    1% of the loan amount (also called “one point”) reduces the borrower’s interest rate by 0.25% for a 30-year loan. One point reduces the borrower’s interest rate by 0.50% for a 15-year loan.

    Example: Loan amount is $120,000. Interest rate for the day of application is 4%
    One point = $1,200. Two points = $2,400. Three points = $3600 and so on. $1,200 to interest rate buy down get to a new rate of 3.75% for a 30 year loan and 3.50% for a 15 year loan; $2,400 to interest rate buy down gets to a new rate of 3.5% for the 30 and 3.0% for the 15; $3,600 to interest rate buy down gets a new rate of 3.25% for the thirty and 2.5% for the 15, and so on.

    The Home Ownership Equity Protection Act (HOEPA) limits the total points and fees which can be contributed by the buyer to 7% of the loan amount (7 points) total.

    Points and fees limited to 7% for a NACA loan includes:

    • Interest rate buy down paid by the Member. Included are third party contributions to the Member, i.e. grants and gifts paid to interest rate buy down on the Member’s behalf.
    • The HAND fee – Files to Citi always – $500. Files to Bank of America always 3% of the total funds held in escrow to complete repairs after closing.
    • Broker fees the lender pays to NACA – Bank of America only – $3,000

    Note: Seller contributions to reduce interest rate are not included in the seven percent limit, however the seller is limited to contributing 10 points towards interest rate reduction (2.5% or 5% off of the interest rate).

    Note: There is no limit to the amount that a NACA Member can contribute to reduce the loan amount (down payment, principal reduction). After 7% of the loan amount goes to interest rate reduction, the Member’s contribution will reduce the loan amount.

    NACA Program Lender Grant: Low and moderate income Members qualify for a lender Grant thus the interest rate buy down is not limited.

    Low and moderate income for purposes of the lender grant within the NACA program is defined as 100% or below the Metropolitan Statistical Area (MSA) median income for the area the Member purchases as documented by the Federal Financial Institutions Examinations Council (FFIEC). The website to check the median income for the NACA Member and determine what is the track median income for the property that is being purchased is:
    https://geomap.ffiec.gov/FFIECGeocMap/GeocodeMap1.aspx

    Note: The income used in determining lender grant eligibility is all income included on the bank application.

    Bank of America Lender Grant Formula:

    7% of the loan amount minus $3,000 (loan origination paid by the lender) minus the HAND fee (3% of the amount held for repairs) equals the total maximum allowable Member contribution to interest rate buy down. For members that qualify for the grant, additional funds contributed will be diverted to principal reduction and the lender will match the amount in interest rate buy down. The interest rate can be bought down in increments of .125% (half points) to a final interest rate of .125%

    Example:

    The Member is contracted to purchase a house for $100,000. The starting interest rate is 4%. There is no escrow for repairs. The Member wants to put $8,000 to interest rate buy down on a 30-year loan and is at 75% of the median income.

    $8,000 buys the rate from 4% to 2%

    The maximum contribution to points is 7% or $7,000.
    For the 30-year loan, $7,000 – $3000 = $4000 ($4,000 is the highest amount the Member can put to interest rate reduction). $4,000 of the Members money will go to interest rate buy down and the other $4000 will go to principal reduction creating a new loan amount of $96,000 rather than $100,000. The lender will match the $4000 and offer the final interest rate of 2%.

    If in the same example, the Member was over 100% of the median income, the same $8000 would result in a loan amount of $96,000 but no lender grant match to reduce the interest rate so the final interest rate is 3.0%.

    The same scenario for the 15 year loan, $4,000 of the Members money will go to interest rate buy down and the other $4000 will go to principal reduction creating a new loan amount of $96,000 rather than $100,000. The lender will match the $3750 and offer the final interest rate of 0.125%.

    If in the same example, the Member was over 100% of the median income, the same $8000 would again result in a loan amount of $96,000 but no lender grant match to reduce the interest rate so the final interest rate is 2.0%.

    ———————————-

    Therefore the only option you would have to get additional interest rate reduction is if the seller were to contribute to the buy down, which they can do up to a maximum of ten points, or use the 15-year Freedom Loan, in which each point of buy down reduces the rate by one half percent instead of one quarter percent.

    Tim Trumble
    Online Operations, NACA
    ttrumble@naca.com

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