Lew Sichelman

With the inventory of unsold houses rising on a daily basis, it’s time for sellers to consider taking a page out of the homebuilders’ playbook – especially when it comes to financing. 

More than 70 percent of builders who spoke with researchers at John Burns Real Estate Consulting in November were offering some kind of incentive to attract buyers to their model houses. Builders, of course, have all sorts of tactics they can employ to attract traffic: reducing their prices, offering free upgrades and paying buyers’ closing costs, to name a few. But the one used most often – and usually the most effectively – is the mortgage rate buydown. 

With a temporary buydown, the builder pays a fee upfront to the lender in exchange for lowering the buyer’s mortgage rate for a set period. The Burns firm found that roughly a third of the surveyed builders were buying down their rate on a temporary basis for two years, while another third bought their rate down for the entire term of a 30-year loan. 

Buydowns come in all shapes and sizes: You can pay to drop the rate as low as you want for as long as you want. But, of course, the lower the rate and the longer the buydown, the more it will cost. Burns reports that builders are paying 5 percent to 6 percent of their homes’ sales prices to lower their buyers’ rates by 1 percent to 2 percent for the entire 30 years. 

2-1 Buydowns Most Popular 

As an individual seller, you likely wouldn’t want to give away that much. But for a lot less money, you can stair-step the buydown: The rate will be its lowest in the first year of the loan, slightly higher in the second, and then in the third year, the rate reverts to what it was when the loan was written. 

The most popular buydown among builders seems to be the 2-1 model. They pay roughly 2 percent of the purchase price to lower the first-year rate by two percentage points and the second-year rate by 1 percentage point. In other words, if market rates are 6 percent, the homebuyer’s rate would be 4 percent the first year, 5 percent the second year and 6 percent thereafter. 

A buyer will still have to qualify at the highest rate that will occur during the 30-year term – 6 percent, in the example above. Some buyers may not qualify, but those who do could get some relief from higher payments for 24 months. 

In some regards, a buydown is similar to an adjustable-rate mortgage (ARM): The rate, and therefore the payment, is lower in the beginning of the loan, then rises after a set period. If you’re selling your place, you can suggest that your buyer consider an ARM. 

Today’s ARMs are not the same as those that helped bring the housing market to its knees in 2008, precipitating a financial crisis and the Great Recession. Back then, one- and two-year ARMs with super-low starting rates and no documentation requirements were dangled before any buyer who could fog a mirror. 

Since then, federal regulators have tightened the rules. Most loans now have a fixed starting period of five, seven or even 10 years before the rate adjusts, according to the Urban Institute, a nonpartisan think tank. The extended time frame allows borrowers to build enough equity to reduce the risk of foreclosure. And by the first adjustment, the thinking goes, most borrowers will have refinanced into a fixed-rate loan. 

What About Assumable Loans? 

Another possibility: If your home loan is backed by Uncle Sam – that is, by the Federal Housing Administration or the Department of Veterans Affairs – it may be assumable, meaning a qualified borrower can simply take over your mortgage. If the loan has a low enough rate, said Florida agent Cara Ameer, “it could be a huge selling tool.”  

Texas broker Erika Rae Albert agrees: “Sellers with an assumable loan should be clearly advertising this unique selling feature.” 

Again, though, your buyer will have to meet your lender’s approval. They’ll also have to come up with the difference between the purchase price and the outstanding loan amount, which means either a larger down payment or a second mortgage, which will also have to be cleared by the lender. 

There are other financing techniques, too, but they are more dangerous. One involves funding the deal yourself; the other is called a “wraparound mortgage.” 

If you own your place outright, you can agree to be your buyer’s lender. If you still owe part of your mortgage, but the outstanding balance is low enough that it’s covered by your buyer’s down payment, you can pay off your loan and still act as the lender. 

Here, you must be as diligent as a regular lender would be. Look over your buyer’s bank statements and tax returns; verify their employment and credit score. Since you are the lender, you get to dictate the interest rate, the length of the loan and other terms. 

A wraparound involves two loans: your original loan with your lender and a new loan with your buyer. You would continue to pay your mortgage and charge your buyer a higher rate on the other loan, with the difference going in your pocket. Again, though, you have to be extremely diligent. Consider employing a real estate attorney to put the deal together. 

Lew Sichelman has been covering real estate for more than 50 years. He is a regular contributor to numerous shelter magazines and housing and housing-finance industry publications. Readers can contact him at lsichelman@aol.com. 

Sellers Should Consider a Buydown to Snag a Buyer

by Lew Sichelman time to read: 4 min