Question About Interest Buy-Down

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  • #67073
    HeatherM
    Participant

    So I understand the benefits of asking the seller to contribute to an interest buy-down for the buyer, but I’m still unclear on how this benefits the seller.

    How is asking the seller to contribute to the interest buy-down more beneficial to them than negotiating a lower sales price on the property?

    For those of you that have bought through NACA or are an agent, how do you approach the topic with the seller or the sellers agent?

    Again, I understand how it benefits the buyer, this topic is about how or if it benefits the seller.

    Looking forward to hearing from people.

    #67075
    Nelsont
    Member

    Seller contributions are very common regardless of naca or not for the simple reason of the number 1 goal in negotiating tactics: making sure both parties feel like they got a good deal. What is normally considered closing cost help is applied to interest buy down in naca. Whether it be closing costs or interest buy down those funds coming from the buyer are liquid out of pocket expenses that cannot be rolled into the loan. So the seller would offer to ease the burden/sweeten the deal. And unless the seller has no equity the money they agree to be putting up on your behalf is not coming out of their pocket it’s just being subtracted from the amount due to them after the sale.

    From the sellers stand point it’s like a car or furniture commercial no money down! No payments for 90 days! Etc. It gets more buyers interested that’s all.

    I once had an agent for a house I bought prior to naca tell me they ask the seller for concessions 100% of the time without fail because you never know.

    In my experience buying 3 houses it is very rare for a seller who is not underwater in a market that is not as hot as San Francisco to refuse at least some concessions.

    #67076
    HeatherM
    Participant

    You’re talking as if you are speaking to a people who have a full understanding of how the real estate market works or has been through a home purchase before – in fact, and not to be rude, you constantly include in your comments how you have bought multiple homes -when many of the people who use this forum have never bought a home, let alone 3. This is all new territory for a lot of us. Some constructive feedback is to really break it down for people. I don’t think anyone here would take offense to it being broken down to a homebuying for dummies level.

    If I’m not mistaken, NACA only covers the buyers closing costs, not the sellers. So asking them to cover closing when it’s already covered isn’t exactly a solid pitch – especially if it’s a sellers market.

    If it’s a sellers market in general, they really have little or no incentive to sweeten the deal, so again, I ask what’s in it for the seller?

    How is asking them to give money to an interest buy down benefit them over perhaps just negotiating a lower sales price?

    NACA really pushes trying to get sellers to agree to a buy down but give little information on how or why this would benefit them. A clear understanding from both sides of the homebuying process, and even some of the term would greatly benefit a lot of people.

    #67077

    You’re right, @heatherm , there’s no specific benefit to the Seller to pay toward your closing costs. It’s a technique used to appeal to Buyers to get their house sold. But there’s also functionally no difference for a Seller to sell a lower price versus selling at a higher price with closing cost help. They’re doing it to benefit the Buyer because it’s -easy for them to do.- If you offer their asking price or you offer their asking price + $10,000 with $10,000 closing cost help it’s nearly identical to them, so long as the appraisal works out. On the other hand, it’s a huge advantage to Buyers, whether NACA or not, and very commonplace for that reason.

    As for the other issue, I don’t believe NACA or anyone on this forum assumes we’re the sole source of education and information on the home buying process. That’s your Realtor’s job, and people here are volunteering their time and experience (which is why it’s totally relevant to say how much experience one has, like @NelsonT does) to help others through the process as specific questions come up. So my constructive feedback on that is to find ways to educate yourself on this process rather than lashing out at the consistently most helpful non-employee on this forum.

    #67079
    HeatherM
    Participant

    In all fairness, I did ask a question specific to educating myself to the process. I got a response that contributions are a commonality. That’s great that it’s common but it did not answer the question that I was trying to educate myself on.

    It sounds that there are not benefits to the seller when it comes to asking them for a buy-down contribution compared to negotiating a lower sales cost. If I’m mistaken on this I’d like some further explanation on how or why one is more beneficial than the other to the seller.

    If that assumption is correct, then how does a buyer make the case for asking the seller to contribute to a buy-down vs. negotiate for a lower purchase price? Especially if it is a sellers market and they really have no incentive to help the buyer?

    Also, as a buyer, why would it make sense to offer more on the purchase price to have them turn around and give that money back? Sure, the overall interest would be lower, but it also increases the amount of debt for the buyer and increase their monthly mortgage payment? Isn’t the purpose of the interest buy-down benefit the buyer? This approach really makes no sense to me.

    Also, does NACA cover the sellers, or just the closing costs of the buyer? This is still unclear to me.

    #67080
    Nelsont
    Member

    @bakerthebaker thank you.


    @heatherm
    I apologize for for my presumptuous tone. I consistently list my experience to underline to some people that some of the issues had with the process or questions regarding naca in general are in fact not isolated or unique to naca. I also do this because in the past there have been comments suggesting these issues would not be had elsewhere.

    To answer your question and to echo @bakerthebaker there is direct financial benefit to the seller. It is a marketing and good faith tactic.

    The benefit to buying down vs lowering the offer from the buyers standpoint (forgive me if you already have this down) is every 1% in interest might lower your monthly payment by about $100 or more whereas lowering your offer by 1% is principal only and will make a $$5 or $10 monthly difference at best. Going back to the seller’s benefit it’s really only in marketing. The seller is more likely to sell a home in general and sell it faster with multiple interested parties and potentially sell it above list price if they advertise on the listing seller help. If they don’t advertise but still concede the help then it’s simply good faith.

    If you get the impression seller help will be difficult to get you can always ask your agent to approach the seller’s agent on other interest in the property. Your agent should be able to tell by the sound of the conversation being had whether it’s a hot property. Quite often you don’t just ask if the seller is in position to contribute, though sometimes that happens. Usually you just write it into the contract and negotiate from there. Maybe the seller has no equity and can’t come up with the funds out of pocket. In that case they would have to take the lower offer instead. In some cases they can’t or won’t negotiate. Usually they will a little though.

    Offering more plus having seller concessions only makes sense for the buyer if it’s a hot property. It makes sense for the seller because most buyers maximum is the list price. So if you offer more there’s a good chance even with the seller help your offer is more attractive to the seller unless a buyer comes in with a list price cash offer.

    The interest buy down is to either increase the amount of house you can afford or decrease the monthly payment. It’s not to decrease debt. In fact buying with naca gives you a 100% debt to value loan which means you will take longer to build equity. Your debt however will always be lower comparatively. If you buy a $100,000 house your debt is not $100,000. It’s the cost of the loan which is $100,000 plus interest. Naca’s interest in always lower. So using that example Buying a $100,000 house through FHA with a 3.5% down payment and no seller help gives you a $96,500 principle plus about 4% interest which will end up costing you about about $50,000 over a 30 year loan. So your debt would be 146500. That same house with 3% naca inetrest would cost you say 35000 so your debt would be 135000 (no down payment) not 146500.

    Bank of america covers all closing costs.

    Does this all make sense?

    • This reply was modified 5 months, 2 weeks ago by Nelsont.
    #67085
    HeatherM
    Participant

    Yes. That actually makes a lot of sense. So here’s my next question and current level of confusion.

    Currently, because of CV-19, many sellers are not doing any showings, whether the space is inhabited or not without a lender approval letter. And currently, NACA requires you to submit a PSL request to get that letter.

    So how do you handle a scenario of getting an approval letter by either requesting one from your counselor if you are unable to include any potential buy-down in that request. At this point mind you, it’s simply so the buyer can see property and have the conversation with the seller about negotiating an offer. If it’s below your PITI, no problem, you request the letter w/o any of that info. But what if the buyer’s PITI is $1000/mo with the current interest rate of 3% for a 30yr and the property, with taxes etc. comes in at $1030/mo. The buyer can’t get the letter because it is over their PITI. So now they can’t get in to see the property, which prevents them from being in a position really initiate any real negotiations with the seller. I’m talking scenarios where the PITI difference is minimal, not scenarios where it is well over the PITI and some serious negotiation is needed.

    Because of all of the complications that have come from CV-19, this is the key issue I am having and why I was initially asking about why asking the seller to contribute to the interest buy-down is beneficial to them. If the buyers agent needs to approach the seller/sellers agent ahead of time to discuss any potential interest buy-down prior to making an offer or having any true negotiation so their client can get an approval letter (simply so they can see the property) having preliminary discussions may be required. Knowing how an interest buy-down can benefit the seller is what I’m trying to understand as it may be required to be used as a tactic prior to even making an offer.

    I hope all of that makes sense, and look forward to any insight you may have in cases such as this.

    #67087
    Nelsont
    Member

    So I am unsure how everything will work with the current crisis. What I can say though is in your request for a psl include the amount of buy down you are going to pay and how much of that is coming from you and as well as how much of that would need to come from the seller. The psl is not exact. It’s an estimate at best and just a starting point for your MC to work with especially if you are buying a house you can’t afford without the seller help. It’s pretty simple to get rough numbers though if you are unsure you can use any mortgage calculator. Plug in a zero down payment and lower the interest until you get the payment you want. Every 0.25% lower than the current naca rate will cost you 1% of the purchase price. So there’s the buy down for your psl request.

    In your scenario you would need to request a psl stating a buy down of a couple points and the piti after the buy down which might be 990ish. Unfortunately $1 (one dollar) over your piti is too much so you will need to have your calculator handy at all times.

    I really don’t want to sound insensitive but I think you are overthinking it and making it harder than it needs to be. Just request the letter for a small buy down amount and work from there.

    Of course the other thing to do is wait this out if it will put you at ease being able to see houses at your leisure.

    Let us know how everything works out. This process during the pandemic is new for everyone!

    #67139
    HeatherM
    Participant

    It’s all been somewhat helpful in trying to gain an understanding of this. I probably am overthinking some of it. There is a lot of info that IMHO, is not always provided in the most straightforward or gone through so quickly that it’s hard to keep it all straight. Thank you for the additional insight.

    I can’t speak for the rest of the US, or my state, but I know in Chicago, many sellers are not doing any showings to anyone that is not able to provide an approval letter prior to seeing the property. In habited or not.

    #67141
    Nelsont
    Member

    Do you mean pre approval? Your qualification letter is equivalent to a pre approval letter if that helps.

    I’m not sure there are even any outside agents that will take you to see houses without at least applying for a pre approval. The qualification letter takes care of that criteria.

    To get an actual approval letter you would need to apply for the loan…standard preapprovals are simply credit and pay stub reviews which is a big reason houses are relisted 2 weeks after they are taken off the market. It’s easy to get a preapproval. However with naca that qualification process is actually more stringent than a loan application so the qualification letter is more powerful.

    • This reply was modified 5 months, 1 week ago by Nelsont.
    #67166
    TTrumble
    Member

    Hello HeatherM,

    I suspect that you are over-thinking things a bit. (I get it, you’re a lot like me!) Let me see if I can give you the answer you are really looking for.

    There’s actually a clue to the answer inside your question, “how does a buyer make the case for asking the seller to contribute to a buy-down vs. negotiate for a lower purchase price?”

    If the seller is willing to negotiate with the buyer for a lower purchase price, that means the seller already planned to have some wiggle room in how much they are going to take for the house. (I think that’s the piece of the puzzle you hadn’t seen yet.) If they didn’t plan that originally, the sellers agent would encourage them to build in some padding. I’m not going to get long winded, but anyone with any negotiation training would make that an automatic must-have. That’s why Nelsont wrote “I once had an agent … tell me they ask the seller for concessions 100% of the time without fail because you never know.” That agent DID know the money was already built into the asking price.

    So, if they have the wiggle room and the buyer asks for the contribution to be used for buy down instead of a lower price, there’s absolutely no difference whatsoever to the seller, and the buyer uses the money in a much more efficient way than by just lowering the price.

    As BakerTheBaker noted, it’s about making everyone feel good about the deal. The seller gets the selling price they actually planned and the buyer gets a much bigger benefit from the money that they would have gotten anyway.

    I hope that helps.

    Tim Trumble
    Online Operations, NACA
    ttrumble@naca.com

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