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Negotiate Brilliantly: Stop Under Utilizing Interest Rate Buydowns

By
Mortgage and Lending with Platinum Home Mortgage Company NMLS #238304

 When in the car business, I was forced to do this same calculation again and again: Would it be better for my client to take the $3000 rebate? Or take the 3% interest rate (offered via the manufacturers lender)? You can't have both, because this benefit is nothing more than a SELLER CREDIT.   

Real estate buyers can take advantage of seller credits in this same way.  When an offer is made on a property, you can negotiate a seller credit and use it to pay closing costs OR TO BUY DOWN THE RATE. Even better, get a seller credit that will pay all the closing costs AND provide a much lower rate on your client's loan.

Believe me when I say, the buyer does not need to understand how it works. But when you tell him he will not need to come up with the cash for closing AND his rate can be dropped by half a point, he will pay attention.

I always encourage my Realtor partners to consider asking for a SELLER CREDIT when making an offer instead of lowering the price. Because most lenders allow seller credits that will far exceed the actual closing costs, a creative Realtor can not only have all non recurring closing costs paid by the seller, but should have plenty of money left over from that credit to "buy down" the rate. (Some lenders will also allow seller credits to cover recurring closing costs as well.)

Most lenders will allow a 3% of purchase price seller credit for closing costs. This credit CANNOT COME BACK TO YOUR BUYER in the form of cash, or be used for repairs to the property. But it can cover points used to buy down  the rate. These points will appear on the closing statement separately from any points the mortgage broker is charging.

When to consider a rate buy down

  • To bring the rate on a jumbo loan down to earth
  • To encourage fence sitters who are waiting for rates to go "even lower"
  • When seller's mindset needs a certain sale price, (a credit to the buyer with a higher sales price sounds better to seller than offering $20,000 less on price)
  • Instead of lowering the price on a listing that will not sell, you provide a seller credit for rate buy down, and advertise the below market rate as "special financing"
  • When the lower rate means the difference between qualifying and not qualifying.
  • When you have a buyer who is focused mainly on interest rate

Remember  these points (no pun intended)

  • You can buy down the rate on both a first and a second loan.
  • The house needs to appraise! Do not raise price to cover a seller credit!
  • Buy down need not be a seller credit. If buyer would like to pay for a buy down with his own cash, he may do so
  • Calculate and discuss with your mortgage partner PRIOR to making the offer. Rate will change if seller credit is negotiated lower, and you will need your mortgage broker to provide new information as to how the rate/payment to the buyer is impacted.

Does this work? In the car business it works so well that rebates and below interest financing are now a standard part of their marketing!

 

 

John Stauffer
John Stauffer MBA, E-pro,CRS, ABR, GRI, SRES - Battle Creek, MI
In our difficult market I have been pushing "Buy Down" as an upfront marketing incentive from the seller to the buyer. I calculate it right into the net sheet at the time of the listing, and I agree with you it is a great incentive. The buyers in my market are asking for the moon at close anyway so might as well get some marketing for my sellers up front by enticing the buyers with a "buy down". Great post!
Dec 09, 2007 06:25 AM
Janet Guilbault
Platinum Home Mortgage Company - Walnut Creek, CA
San Francisco Bay Area Direct Mortgage Lender

John, I am so impressed that you think this way. I find most Realtors hesitant, or in the dark.

I currently have a buyer who is thrilled with his Realtor for suggesting he ask for the entire 3 %. This means every single penny of recurring and non recurring costs are covered ($10,000) AND his rate came down into the 5's on his jumbo, 95% loan.

I told him to please go to all of his Christmas parties and brag about his Realtor and his mortgage broker (me) being brilliant.

Why don't we see this more often?

Dec 09, 2007 07:21 AM
Gary Woltal
Keller Williams Realty - Flower Mound, TX
Assoc. Broker Realtor SFR Dallas Ft. Worth
Janet, I love that you've come up with creative ideas in the negotiation and that you suggest consulting the lender prior to an offer. Lenders I've found are full of creative ideas too.
Dec 09, 2007 11:05 AM
Janet Guilbault
Platinum Home Mortgage Company - Walnut Creek, CA
San Francisco Bay Area Direct Mortgage Lender
One of the biggest oversights of our industry is not creating a synergy between the Realtor and the Mortgage Broker. In the car business this is a fine art, and it works so beautifully. Sometimes I think we tend to work against each other.
Dec 09, 2007 12:51 PM
Bill Nazur
First Lending Solutions - Riverside, CA

Janet

You hit on 2 very powerful topics: 1) the financing recommendations that can only come from an experienced mortgage pro and 2) that properly positioned, the Realtor and the Mortgage Pro need to be in concert wity a common goal, not constantly bickering and fighting with each other.

You're always excellent. I even referred to one of your stories in this weeks' Mortgage PRO Week in Review.

Great job!

Dec 09, 2007 02:57 PM
Matthew J Blum - (retired from the business)
Palm Beach Gardens, FL

Janet, Oh how you bring back my memmories of do I take the rate or the cash...lol  So many people would come into the showroom saying I want the rate but if you look at it both ways many times it was better for the client to take the cash and go with a regular loan.  (plus they had 3k less on a car loan).

Great post with great advice!

Dec 09, 2007 11:06 PM
R. B. "Bob" Mitchell - Loan Officer Raleigh/Durham
Bank of England (NMLS#418481) - Raleigh, NC
Bob Mitchell (NMLS#1046286)

In a way it's back to the basics now, isn't it?  We used to do these buydown programs all the time.  Looks like they're making a comeback.

 

Bob Mitchell

ValueList Real Estate Services, Inc. 

Dec 10, 2007 08:41 AM
Janet Guilbault
Platinum Home Mortgage Company - Walnut Creek, CA
San Francisco Bay Area Direct Mortgage Lender

I don't think I was in the mortgage business when you used to do buy downs. It is one of those back to basic things, I guess. I do them because they are second nature to me from my car business days.

Matthew.....You are right about that...usually the combo of the regular rate and the rebate was better, but part of that was having to wash away negative equity. Geez, if we could only roll the negative to the next house like we did in the car biz we could make this whole crisis go buh- bye.

Dec 10, 2007 09:30 AM