If you’ve been shopping for a home since early 2022 when mortgage rates rose, you’ve probably come across a buyout.
A buydown is used to lower a homebuyer’s mortgage rate, either temporarily or permanently.
It can make mortgage repayments cheaper during the first few years of your loan term, or throughout the entire 30 years.
These purchases serve as an incentive to buy a home, even if interest rates and home prices are high.
Home builders are fully committed to it, in part because they don’t want to lower their prices. And maybe because they are needs Let’s offer to move the product.
Price cuts are great, but they can also be necessary
As mentioned earlier, homebuilders are big into mortgage rate purchases, taking exposure in earnest since 30-year fixed rates began rising rapidly in early 2022.
Before the spring of 2022, mortgage rates were near record lows, but once the Fed ended its mortgage-backed securities (MBS) purchase program known as quantitative easing and began raising the federal funds rate, conditions quickly changed.
The 30-year constant was in the 3s to start 2022, and quickly rose to around 6% by the same summer.
It eventually rose to 8% before falling back to the 6s level.
At the same time, house prices continued to rise, albeit at a slower pace than before. This has clearly dampened affordability, but homebuilders are not lowering their prices.
They cannot sit on their stock as an individual can. They need to move their inventory.
To solve this problem, they manipulated the mortgage rate segment. They did this by offering mortgage rate buyouts.
So, if the ongoing 30-year fixed rate is 7%, they will offer a reduction in the value of the property for the first few years to make it more palatable.
A 3-2-1 joint purchase offers an interest rate that is 3% lower in the first year, 2% lower in the second year, and 1% lower in the third year.
This means 4%, 5%, 6%, and finally 7% for the rest of the loan term. While this could attract homebuyers who can afford the 7% rate, there was a catch.
Borrowers still need to qualify for the mortgage at the effective interest rate, which in the previous example is 7%.
In other words, if the borrower is not physically able to purchase the home at a mortgage rate of 7%, using the lender’s maximum income-to-income ratio calculations, they will not be able to purchase the property.
As such, builders have had to become more aggressive and ensure that the interest rate is low as well, and not just the teaser rate in years 1-3.
Many builders offer bulk purchases at temporary and permanent rates
While the savings from temporary interest rate cuts are a good incentive to buy a home, they are just that, an incentive.
If you really want to qualify more homebuyers, you need to lower the interest rate on the bond for the entire life of the loan.
This interest rate is what banks and mortgage lenders use to qualify homebuyers. Simply put, they cannot use the applicable rate for only a few years.
This can put the borrower on the hook once the rate increases to the higher actual rate.
So they qualify it at the true mortgage interest rate, which is somewhat similar to short-term adjustable-rate mortgages, which can also adjust to a higher rate once the initial period is up.
Knowing this, home builders began offering temporary/permanent group purchases to solve both the affordability piece and the incentive piece.
Using the same example as above, the builder might offer a 2/1 purchase discount instead with a permanent purchase discount attached.
For example:
First year: rate of 3.875%
Second year: rate of 4.875%
Years 3-30: 5.875%
Now, the lender can qualify the borrower with an interest rate of 5.875%, since that is the highest rate that will apply during the entire 30-year life of the loan.
This could be the difference between an approved mortgage and a rejected mortgage.
Lenders are required to use the interest rate to qualify a mortgage
Note that both Fannie Mae and Freddie Mac require lenders to qualify a borrower when they notice this.
In the case of a temporary buyout, “the lender must qualify the borrower based on the price of the note without regard to the lower purchase price,” it says Fannie Mae.
If the purchase is permanent, “qualification is based on the monthly housing expense-to-income ratio calculated using the monthly payment at the price of the permanent note purchased,” according to Freddie Mac.
This may explain why many of today’s large housebuilders offer both temporary and permanent purchase offers.
They interest buyers with a low temporary rate, and make sure they qualify for a mortgage with a permanent purchase rate.
In the process, they can continue to unload their inventory and ensure that prices do not fall, despite the erosion of affordability.
Home builders continue to win despite 7% mortgage rates. It can be said that home buyers are getting a good boost as well.
Just pay attention to this purchase price if you’re buying a newly built home to ensure the lower rate doesn’t apply.
Source link
