Melissa:
What are buyers doing to get affordable financing for Utah Home Buyers? Well, today I am going to interview Jason Allen. He is one of the lenders that I work with here in the Greater Salt Lake City area. And we’re going to talk about just that. Now, if you have any lending and mortgage questions, I am going to put Jason’s information up, so you can contact him. It’s going to be on the screen in the video, but I’m also going to drop it down below in the description. If you haven’t already, make sure you subscribe to my YouTube channel and click the bell, that way you’re alerted each week when I bring you new real estate related information, like the video today. Hey, so Jason Allen.
Jason Allen:
Hello.
Melissa:
Second time I’ve had you on YouTube.
Jason Allen:
[inaudible 00:00:48].
Melissa:
And yeah, we’ve talked about things. But since then, I mean, we talked back when it was, what could you do for buyers to get their offer accepted? Because they were competing against 20 other people and we needed you to close in 24 hours to win the contract type stuff. But now it’s a completely different dynamic for buyers. And that is, they’re getting priced out of the market, because they can no longer afford the high interest rate payments combined with the higher asking price of sellers. So if anybody’s in the real estate world or been looking at it, you hear things like doing buy downs, a 2-1 buy down, you marry the house, date the rate, things like that. So I wanted you on here today to talk to us a little bit more about what you’re seeing and give examples to people, so they can understand to somebody that’s not in our business, what is a 2-1 buy down? Why does this work and how does it benefit buyers right now?
Jason Allen:
Absolutely. FHA two, one buy down. And what’s funny is, I’ve been doing this for so long that I was really surprised when I started hearing this loan program being passed around or that it could possibly be an option. And what’s funny is, kudos to you, because when I watch videos of other realtors and other loan officers, I was listening to them and I was hearing it called everything in the universe except an FHA 2-1 buy down. It was the FHA 2-1, I would hear all kinds of different names by real estate agents and by loan officers that haven’t been in the business as long as we have. So kudos to you for calling it by its correct name. It is the FHA 2-1 buy down. So essentially, I’m just going to jump right into what it is.
Melissa:
Yes, absolutely.
Jason Allen:
So it is a loan program that allows the seller to pay a fee at closing that essentially buys down the buyer’s interest rate 2% to start, so that their monthly payment is lower in the beginning. For instance, I’m going to give you an example and I’m going to use the purchase price example of $500,000.
Melissa:
Okay.
Jason Allen:
So FHA deal, $500,000 price, three and a 5% down payment, let’s say as an example, this may not necessarily be what the rate is today, but we’re going to use this number just to illustrate how powerful this is. Let’s say, the interest rate is 6.75%. If the seller pays that fee at closing, it doesn’t come out of their pocket, it comes out of their proceeds just like any other charge would on their side of the ledger. They pay the fee, now the start rate for the buyer is 4.75% the first 12 months. And then in the second 12 months, that rate is fixed at 5.75, so it graduates a tiny bit. And then in the third year, and in the remaining years of the loan term, it’s fixed at 6.75.
Melissa:
Okay.
Jason Allen:
The principle and interest payment on a $500,000 price with three and a half percent down is $3,442.43. Okay, got that?
Melissa:
Okay.
Jason Allen:
When you drop the rate down to 4.75, that same loan amount for that first year, it drops to $2,768.54. It’s over $670 a month lower.
Melissa:
Wow.
Jason Allen:
That’s substantial.
Melissa:
Yes.
Jason Allen:
That’s a car payment. That’s almost a truck payment these days.
Melissa:
Yeah.
Jason Allen:
That can really be helpful for somebody.
Melissa:
Right, absolutely. And the idea with that and why people are saying you marry the house and you date the rate, is because it’s giving buyers a little bit more leeway, a little bit more time to like, “Okay, I have a place, let’s hope interest rates drop. And when interest rates drop before my two year buy down…” Really, your gradual two year buy down. “I’m going to call Jason back up and I’m going to re-fi, because interest rates are lower.” That’s the idea and the hope that people have with this program.
Jason Allen:
Right. This loan ideal for people that are brand new in their job and expecting their income to increase over the next 2, 3, 4 years, right? But you get to start off at that low rate, allow your budget to acclimate to these increasing mortgage payments. I mean, ultimately, even if the rate was 6.75, if rates don’t come down and let’s say, they continue to go up, you’re going to be pretty thrilled that you have a loan at 6.75% that’s fixed for 30 years.
Melissa:
Right.
Jason Allen:
Especially, since you got that initial two year start of the lower monthly payments.
Melissa:
Right. So hopefully, you’re saving up a little bit with what you are starting your loan at.
Jason Allen:
Yeah.
Melissa:
So let’s just get an idea then, because I mean, I work with buyers and sellers. So if somebody was going to do this, you said the seller pays the fee, what does that look like? Because it’s going to be important to the seller to know what they need to pay, but it’s also important to a buyer, because they feel like, “Hey, they’re not giving me X amount off the sales price.” But over that time, you’re probably saving more than the upfront. Let’s just say, it’s $15,000, probably that interest rate savings is probably going to be very much more beneficial for the buyer.
Jason Allen:
Yeah. So this is what we’ve all been saying since rates started creeping up, is that it’s better for a seller to pay this fee to buy down the rate for the buyer, than it is for the seller to take a big old chunk out of their price by lowering it to try to entice people to buy. You end up netting less by lowering the price as a seller than you would if you paid this fee for the buyer. So a good rule of thumb, do you want me to get into the weeds of what that would look like?
Melissa:
Yeah, absolutely. Let’s do it.
Jason Allen:
Okay. So a good rule of thumb would be that fee would be 2.625% of the loan amount for the buyer.
Melissa:
Okay.
Jason Allen:
Okay. So in our example, that would be about $12,665 in fee that they would pay. But you can see the power that has to lower the initial payment for the buyer. As a seller, “Hey, I’m really making it easy for them to qualify.” Because the amount that you would have to lower the price to get to that point would be pretty substantial.
Melissa:
Right, well, and that’s what I was just going to say. Really, the buyers are coming out ahead on that in the sense that, let’s round up and say a seller dropped the price $15,000. Well, that $15,000 sales price drop is not going to make that much of a payment to a buyer. I mean, what are we talking about? Maybe $20 a month difference.
Jason Allen:
Yeah, not that much.
Melissa:
Versus $600 and something with the 2-1 buy down.
Jason Allen:
I’m going to do the number right for you right now. Are you ready for this?
Melissa:
Yep.
Jason Allen:
Your loan, so in this example, $500,000, okay? I’m running my calculator right now.
Melissa:
$500,000 sales price.
Jason Allen:
$500,000 sales price. The base loan amount would be $482,500. Now, FHA does have an upfront mortgage insurance premium that we have to add to that.
Melissa:
Right.
Jason Allen:
But we’re just going to keep it simple and just run a quick and dirty number here just to give you a concept of how it would look.
Melissa:
Right.
Jason Allen:
$482,500 would be the loan amount with three and a half percent down in order to make your payment be the same on that 482 at 4.75, the seller would have to lower their price enough that the new purchase price for the buyer would be, drum roll please, 441. You’re starting off at five and in order to match that payment for the buyer, you have to lower the price to 440, that’s $60,000 difference in price. You net that much less. Whereas if you just paid a $12,600 fee-
Melissa:
Yeah.
Jason Allen:
You would net more money and the buyer would have a better payment.
Melissa:
Right, yeah. That’s crazy. So great options for FHA buyers that have limited down payments and all of that. And I tell people all the time, and when we first start a real estate transaction, everybody laughs at me when I say this. And then by the time we get to the end, they’re like, “Melissa, you were right. I didn’t get it when you said it at the beginning.” But real estate is nothing but legalized gambling in Utah, that’s all it is. So people don’t understand that, but it really is. And that’s the gamble that buyers are taking with the 2-1 buy down and hoping that the interest rates drop.
Jason Allen:
Here’s cool though. Can we talk about their options for refinancing?
Melissa:
Yes, let’s do it.
Jason Allen:
Okay. So the reason why a lot of home buyers, especially right now that are in the market that want to buy, if you have less than perfect credit, this FHA loan is really easy on people with less than perfect credit. So if your credit score is lower, you can do this. Now, you’re going to get a low fixed rate and an affordable monthly payment, you get to buy sooner than later. You got to pay to live somewhere, regardless of whether you’re renting or buying, so it might as well be yourself that you’re paying by buying. Now, let’s say your credit score never improves over the next 18 months, two years, however long it takes for rates to get back five years to a less than where they are right now.
