Interest rate buy down

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  • #37325
    Heb1
    Member

    @TTrumble
    Could you help clarify:

    Can the seller contribute toward the 7%+ for the match program? More specifically, do I have to come up with the 7% on my own or can the seller kick in?

    For example, can I bring 5% and have the seller contribute 4% toward the buy down and still qualify for the bank match?

    #37328
    carlito78
    Member

    Not Tim but since he covers this topic frequently, below is what he responds with:

    Here is the complete explanation of the interest rate buy down program, including how the matching grant works, for both Citi and BOA:

    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%.

    #37329
    Heb1
    Member

    Thanks Carlito. I’ve read this several times before but still don’t have a clear answer to my question.

    Can the seller contribute toward the 7%+ for the match program? More specifically, do I have to come up with the 7% on my own or can the seller kick in?

    For example, can I bring 5% and have the seller contribute 4% toward the buy down and still qualify for the bank match?

    #37334
    TTrumble
    Member

    Hello Heb1,

    Seller funds cannot count toward the buyer’s contribution. It is, by law, a completely separate contribution. The buyer must provide their own funds to count toward and surpass the 7% threshold for the bank match to kick in. This is actually one of the reasons why the source of the buyer’s interest rate buy down funds must be accounted for, such as savings, funds from a grant program, gift from a family member, etc.

    Tim Trumble
    Online Operations, NACA
    ttrumble@naca.com

    • This reply was modified 4 years, 4 months ago by TTrumble.
    #37339
    pratik
    Member

    @ttrumble – you mean the buyer (not seller) in the second sentence…

    #37341
    TTrumble
    Member

    Hell pratik,

    Thanks for catching the typo (though it’s the 3rd sentence). Corrected.

    Tim Trumble
    Online Operations, NACA
    ttrumble@naca.com

    #37408
    Heb1
    Member

    @ttrumble
    Comparing the Bank of America loan to the Citi loan, it looks like the Bank of America loan directly applies $3,000 to principal reduction at the point I exceed 7%. It appears the loan through BofA is far more advantageous than the one through CITI. Can you help me to better understand this? (By the way, I am working with a purchase price of $200k with $15k in personal funds for the buy down).

    *No repairs needed on the home

    #37409
    pratik
    Member

    @Heb1 – BofA is advantageous if one’s income is below median. For those with income above median, Citi is a better option. However, members don’t get to choose lender (I think) and disregarding, any of the lenders through NACA would be better than any other mortgage out there!!!

    #37414
    eblacio
    Member

    Just for the record, I went today to my requalification appointment. Again, my counselor and the Newark office manager told me that in order to buydown the interest over 7 points, I need to be below 80% of the median income. I told him about Tim’s reply and the Home buyer’s workbook’s statement in page 26, but he said that the one with the last word is the mortgage counselor. That they are the ones who are licensed to know these guidelines. Finally, he said that the counselors have a system where they input my information and that if my income is over 80% of the median, then said system would not let them approve me for a buydown over 7 points.
    These news are very disappointing for me as my income is over 80% of the median but below 100%.

    #37415
    krisfnbs
    Participant

    Eduardo,

    DO NOT LISTEN TO THIS COUNSELOR. THEY ARE FLAT OUT WRONG. IT IS NOT DISAPPOINTING NEWS. IT IS INCORRECT INFORMATION. I dont know how many times we have to say this to you.

    Tim, Can you call this counselor directly and TELL him he is wrong, and how this works? If not, I will. I’m starting to get aggravated at this counselor. I don’t know how long he has worked for NACA, but someone needs to review this guy. His intentions may be genuine, but the information is misleading. Who knows how many people wanted to buy their rate lower and did not question further.

    #38111
    TTrumble
    Member

    Just an update…

    We finally managed to get all concerned together this afternoon and get the confusion straightened out. Eblacio is going to have one fantastic interest rate to brag about!

    Tim Trumble
    Online Operations, NACA
    ttrumble@naca.com

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