FHA and Investor Specialist

     Mortgage financing tends to move in cycles in order to best meet the needs of the public.  Back in the early 90's, when there were more listings than buyers, seller concessions often were used as an incentive to enable first-time buyers to purchase a home.  Another tool used was the "seller paid buydown", or 2-1 buydown.  But what is a 2-1 buydown, how does it work, and more importantly how can it help to sell a home?  For example purposes, let's assume we have a home selling for $350,000 and a buyer looking to finance $300,000 on the home.

     At a current market rate of 6.25% on a 30 year fixed loan, the principal and interest comes to $1847.15 per month.  The way a 2-1 buydown works, a buyer can temporarily "buy down" their interest rate to 4.25% for their 1st year- at a payment of $1475.82, then 5.25% for their 2nd year paying $1656.61, then have their rate of 6.25% for years 3-30 at a payment of $1847.15.  

     The catch is that the savings in payments for the 2 years, which total $6742.44, are paid upfront as prepaid interest.  This can be paid in the form of a seller concession, builder concession, or be paid by the borrower upfront.   In this case, the seller concession is less than 2.5% of the purchase price.  The benefit lies in the fact that the financing is a fixed rate, a lower payment is offered without negative amortization, and the buyer knows ahead of time exactly what adjustments will be made in their payment.

     A motivated seller can differentiate themselves in today's market by offering a 2-1 buydown and Real Estate Agents can intrigue buyers by offering "special financing" on selected properties.

Q: What is the difference between a man and a mortgage?

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A: A Mortgage matures after 30 years.

Q: What do you get when you cross an underwriter and a Latin Teacher?

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A: Someone that enjoys declining loans.

I have a much longer joke that I will post when I figure out exactly how to write it out properly. 

Recently, many subprime mortgage lenders have gone out of business.  There are even websites popping up that are chronicling the mortgage industry shakeup.  The main reason seems to be due to Early Payment Defaults, or EPD's, First Payment Defaults, and poor performance of the securities subprime loans are bundled into.  Lenders with insuffient capital to buy back poorly performing loans have been forced to shut their doors rather abruptly.  The bad part of this shakeup is that many people will find out just prior to their loan closing that they no longer have a loan that can be funded.  The good news is that many of the "cowboy" type loan officers out there with little real estate knowledge and even fewer scruples will no longer be in business.

Only time will tell.