Interest rate buy down

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This topic contains 25 replies, has 8 voices, and was last updated by  TTrumble 2 years, 1 month ago.

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  • #34198

    How much is it to buy the interest rate down?

    #34200

    KRich_84
    Member

    It is 1% of the total of the mortgage amount, and this reduces your rate by .25% for a 30-year mortgage. Also, each .25% is considered a point and the max you can buy down your mortgage to is 10 points. So, if the starting rate is 3.25% you can buy your rate down to 0.75%.

    #34202

    pratik
    Member

    I don’t think there is a limit to the max. However, I heard that a seller can only contribute up to 7 points. If you want, you can pay out of pocket to further buy down the interest rate. The minimum interest rate that you can achieve is 0.125% if NACA is working with Bank oF America for your loan or 0.0625% if NACA is working with Citi (or Fidelity?). There is no way you can get 0% interest rate as it is restricted by government, so the rate has to be some positive number, no matter how minuscule it is.

    #34204

    TTrumble
    Member

    Hello KRich_84,

    I’m afraid your response to determined1227 is quite a bit off track.

    For a 30-year loan, one point (1% of the mortgage amount) reduces the interest rate by 0.25%.

    For a 15-year loan, one point reduces the interest rate by 0.5%.

    The member (Buyer) may only contribute a maximum of seven points and the seller may only contribute a maximum of ten points.

    Here are all the details:

    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%

    CitiMortgage Lender Grant Formula:

    7% of the loan amount minus $500 Hand fee when funds are held to complete repairs after closing equals the total amount of Member funds to interest rate buy down. For members that qualify for the grant additional funds will be diverted to principal reduction and the lender will match the funds in interest rate buy down. The interest rate can be bought down in increments of .0625% (quarter points/one-eighth points) to a final interest rate of .0625%

    Example:
    Bank of America:
    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%.

    Example for CitiMortgage:

    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 and is at 75% of the median income.

    For a 30 year loan, $8,000 buys the rate from 4% to 2%

    Seven points ($7,000) from the Member can go to interest rate reduction. The eighth point ($1,000) goes to principal reduction, and the lender contributes a matching $1000 toward interest rate reduction. The loan amount will be $99,000 with an 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 $99,000 but no lender grant match to further reduce the interest rate so the final interest rate is 2.25%.

    For a 15 year loan, seven points ($7,000) from the Member can go to interest rate reduction. The eighth point ($1,000) goes to principal reduction, and the lender contributes a matching $875 toward interest rate reduction. The loan amount will be $99,000 with an interest rate of 0.0625%.

    If in the same example, the Member was over 100% of the median income, the same $8000 would result in a loan amount of $99,000 but no lender grant match to further reduce the interest rate so the final interest rate is 0.50%.

    Tim Trumble
    Online Operations, NACA
    ttrumble@naca.com

    • This reply was modified 2 years, 11 months ago by  TTrumble.
    #34263

    pratik
    Member

    Impressively pristine explanation with examples – thanks Tim!

    Just to clarify, if a buyer is below 100% of median income and puts money towards buying down, the amount will be matched only in excess of 7% (minus $3K + 3% of hand repair cost in case of BofA and $500 HAND fee, if any, in case of Citi). If the buyer puts any money less than that, it won’t be matched by the bank. In other words, the bank will match only the money that goes towards principal reduction (after maxing out buydown) and that too to their bottom limit of 0.125% or 0.0625%.

    On the flip side, while it is unwise if buyer wants to stay in the same house for more than a few years, can buyer put money down exclusively towards principal reduction without buying down interest rate (sort of like a down payment)?

    #34283

    TTrumble
    Member

    Hello pratik,

    Your understanding of the process for a buyer below 100% of the median income is accurate.

    Buyer’s funds MUST be used for interest rate buy down up to the maximum seven points before any funds can go toward principal reduction, period. Income level is not even a factor here. Interest rate buydown comes first, without exception.

    Tim Trumble
    Online Operations, NACA
    ttrumble@naca.com

    #36960

    eblacio
    Member

    Hello,

    Do this rules still apply as of today?

    Also, in the census website provided above, there are a few values to consider; for example:

    2010 MSA/MD/statewide non-MSA/MD Median Family Income $68,006
    2016 FFIEC Estimated MSA/MD/non-MSA/MD Median Family Income $72,600
    % below Poverty Line 13.53
    Tract Median Family Income % 100.77
    2010 Tract Median Family Income $68,535
    2016 Estimated Tract Median Family Income $73,159
    2010 Tract Median Household Income $60,828

    Which is the value I should consider to know if I am below the median income in that area?

    Thanks,

    #36993

    TTrumble
    Member

    Hello eblacio,

    The buy down guidelines have not changed from the earlier post.

    You would definitely use the more recent 2016 figures as opposed to something from 2010.

    While your counselor will be the one the verify the exact numbers for you, based on what you wrote, the “2016 FFIEC Estimated MSA/MD/non-MSA/MD Median Family Income $72,600” would be the figure you would use.

    Tim Trumble
    Online Operations, NACA
    ttrumble@naca.com

    • This reply was modified 2 years, 4 months ago by  TTrumble.
    #37085

    Kristopher Fraley
    Participant

    @eblacio, what area in Maryland are you looking to buy in? I took advantage of the lender matching grant interest rate buy down and I know it very well….feel free to email me with any questions. Kris.fraley@gmail.com

    #37191

    eblacio
    Member

    Hello all,

    I am based in NJ. For some reason, my counselor told me that it doesn’t quite work that way. He says (and it’s also stated in NACA) that in order to lower the interest rate below 7 points, I need to be at 80% of the median family income of the MSA or the tract area should be 80% of the median income of the MSA. Unfortunately, even though I am below 100% income of the MSA, I am not below 80% income of the MSA. This is very dissapointing as it limits my house price range a lot.

    Thanks.

    #37194

    TTrumble
    Member

    Hello eblacio,

    You are confusing the interest rate buy down program with the guidelines under which the regional Maximum Acquisition Cost may be waived. One has nothing to do with the other.

    I’m afraid either your counselor mis-spoke or you misunderstood him. The explanation of the interest rate buy down program posted above is accurate.

    Tim Trumble
    Online Operations, NACA
    ttrumble@naca.com

    #37211

    eblacio
    Member

    Thank for your help Tim. For some reason, there is a big discrepancy within NACA here. I contacted the office manager here in Newark, NJ and he also agreed with what my counselor said. Finally I contacted the live chat in the NACA website and they also agreed with my counselor. It’s a huge disappointment for me because my income is right between 80% and 100% of the median income which means that I can’t reduce the interest rate more than 7 points under what my counselor and office manager says, but I could reduce it to 0.0625% under what you said. With this, my price range changes drastically, and with the high prices and tax amounts in NJ, this makes a significant difference. Thank you for your help again, and if there’s anything I could do, please advise. Thanks.

    #37212

    Kristopher Fraley
    Participant

    Eduardo,

    Tim is the correct one here, as am I when I emailed you earlier in the week. Unfortunately these NACA employees are getting the 80% rule confused. Respectively show them this thread. Do not take no for an answer. If you need help crunching the numbers, email me. As I said, if I did not fish for answered beyond what my local NACA office told me years ago, I would have never ended up with 0.0625%

    Maybe Tim can get someone higher up in NACA to call this office and clear this up. I would really dislike seeing people not take full advantage of the naca buydown if they truly qualify from mere ignorance…

    #37265

    TTrumble
    Member

    Hello eblacio,

    Did you you ever get the confusion between the interest rate buy down and the Maximum Acquisition Cost resolved? Just in case, here are the relevant sections from your Home Buyer’s Workbook:

    Page 26

    NACA Members have always been able to buy-down the interest rate to virtually zero percent. However, the new regulations enacted by the Consumer Finance Protection Bureau (“CFPB”) have eliminated this option. This regulatory limitation is most harmful to low and moderate income borrowers. Despite this, NACA has been able to get it’s participating lenders to provide millions of dollars in grant funds to allow low and moderate income Members to obtain the same and greater impact of the unlimited Buy-down. Through these grants, Members at or below one hundred percent of the median income for the area in which they are purchasing, can still buy the interest rate down to virtually zero (note: this program is subject to change). Members above the median income may be limited in how many interest rate points they can buy down.

    Page 37-38
    Maximum Acquisition Cost:
    The Acquisition Cost consists of the purchase price and the amount escrowed for repairs whether financed or paid out of pocket (“Acquisition Cost”). There may be a Maximum Acquisition Cost depending on your income and the area where you purchase. These limits allow NACA to focus its program on low-to moderate-income people and communities while not limiting participation based on their income (i.e. there are no income limits). The following are the three categories:

    a. Targeted Members
    – Members whose income is less than 80% of the median income in the Metropolitan Statistical Area (“MSA”) or assessment area where the Member anticipates purchasing at NACA Qualification. If the Member changes the area they decide to purchase, their targeted eligibility will be based on where they actually purchase. This Targeted Members can borrow up to conforming loan limits;

    b. Targeted Area
    – Properties in a census track where the medium income is less than 80% of the median income in the MSA. Members purchasing in Targeted Areas can borrow up to conforming loan limits; or

    c. Non-Targeted
    – Members who are not Targeted Members or purchasing in a Targeted Area, cannot purchase a property greater than the maximum Acquisition Cost for the area.

    Tim Trumble
    Online Operations, NACA
    ttrumble@naca.com

    #37268

    Kristopher Fraley
    Participant

    LOOK AT TIM COMING IN THE CLUTCH WITH THE TEXTBOOK ANSWER!

    .

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