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MLOs: You Could Save Your Borrower Thousands

by | Oct 26, 2023

In “celebration” of high interest rates, many home builders are offering buydowns to sell their inventory. Recent research shows that as much as of 75% of homebuilders are offering buydowns to keep their inventory flowing, which can be extremely beneficial to mortgage loan originators and their clients. According to National Mortgage Professional Magazine, “Mortgage originators need to make sure they tout the benefits of buydowns,” especially to make clients a bit more excited about massive interest rates.

Since homebuilders generally can’t afford to wait and see what happens with the market, they must sell their new homes rapidly to pay back their loans and make a profit. Builder buydowns help relax buyers and keep new home production rolling.

As you likely know, a buydown is an upfront payment that temporarily lowers the interest rate on the loan, usually for 2-3 years. A 2-1 buydown lowers the interest rate for 2 years, and a 3-2-1 buydown lowers it for three years. Permanent buydowns are similar, except the interest rate is lowered for the life of the loan.

Interestingly, builder buydowns are not consistently accounted for as part of the appraised value (or sale price) of the home. According to appraiser Gerry Allard, whether or not the buydown is factored into the appraised value “is very much [up to] the interpretation and determination of the appraiser.” This is important because these buydowns have the potential to artificially inflate home values; in fact, “the pricing data that we have from the Census Bureau about sales of new single-family houses do not include the costs of mortgage-rate buydowns and incentives,” according to Wolfstreet.com.

Of course, appraised values and sale prices are different things; however, one thing they share in common is that they often do not reflect builder incentives, which may artificially make prices and values seem higher.

This possibly inflated pricing data—and inconsistent appraisal data—has the potential to be a factor in housing prices rapidly decreasing if builders stop offering buydowns liberally. This is important to warn borrowers about; they must be prepared not only for their buydown period to end, but for their home to possibly decrease in value. That said, if buyers are prepared, these buydowns can make their purchase much more affordable. According to John Burns Research and Consulting, builders spend between $6,000-$48,000 on buydowns per home, though exact figures are difficult to come by.

It is important to note that some builders may factor the cost of buydowns into their pricing, so in a way, the consumer may be indirectly paying for them. This is an example of why the housing market can be so difficult to predict; are builders subsidizing some of the buyer’s purchase, which artificially inflates sold prices? Or does new home pricing already reflect the cost of buydowns? While the industry tries to answer this possibly unanswerable question, mortgage loan originators should make sure their clients take advantage of whatever incentives they can get. These incentives may be the difference between a borrower going through with a purchase or backing out.

Remember that a buydown is usually not permanent, so it’s not a way to get an unqualified applicant approved. The rate adjustment after the buydown period ends can (and should) put off some buyers, especially those taking out a much more loosely regulated jumbo loan. Non-conforming loans aside, the mortgage market is much more tightly regulated than before 2008, so most homebuyers will not be approved for a loan they cannot afford even after the buydown expires. Of course, people will always find ingenious ways to spend money they can’t afford to lose, so preparation and caution is essential.








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