Special Financing Options offered by home builders

Several homebuilders around Dothan have started offering some special financing options for purchasers of their homes. Programs called 2/1 buydowns are becoming more and more common as builders try to clear finished homes from their inventory. This post will cover this financing option in more detail.

When a home buyer is using FHA financing, rules state that the seller is allowed to contribute up to 6% of the sale price toward costs associated with the sale, including closing costs, prepaid items, etc. These special financing options take advantage of this rule and use this money to buy down the purchaser’s interest rate for the first two years of their loan. Here is an example of how this might work on one of my new construction listings, 107 Brittany Drive in Dothan.

• At a sale price of $175,900, the seller could contribute up to $10,554 (6%) toward buyer costs.
• The interest rate on the loan would be 6.25%, which means a principal and interest payment of $1066.32, starting in year 3
• The rate in year 1 would be 4.25% with a P&I of $851.96
• The rate in year 2 would be 5.25% with a P&I of $956.32
• The difference in payments between the actual P&I ($1066.32) and the P&I during the first two years would be $4002.32, which is paid by the seller at closing as part of the 6% contribution.

That still leaves $6551.68 available, which would more than cover closing costs and probably most of the prepaid items. Translated, the buyer gets a new home with only the 3% FHA down payment out of pocket plus reduced payments for the first two years. The builder gets the home sold while protecting the sale price and property values. Yes, this program could cost the seller more money compared to more traditional financing. Each seller will have to look at their bottom line to see if this is an alternative they can offer. These programs can also be offered on resale homes!

This program can also be used on conventional financing, although the amount the seller can contribute is sometimes lower. On a conventional loan at a 95% loan-to-value ratio (5% down payment), the seller can only contribute up to 3% toward buyer costs. At 90% LTV, the contribution can be as much as 6%. In addition, there are conventional mortgage products that allow the seller to make the first three payments for the buyer, which gives the immediate benefit to the buyer rather than stretching the goodness over the first two years with a reduced payment each month.

In addition to 107 Brittany Drive, 100 Crooked Creek and 101 Crooked Creek are also eligible for this type of financing. If you are interested in learning more about either of these programs, or want to explore some other financing options, contact us.