For anyone trying to sell or purchase a home in today's tough market -- but stymied by the 16-percent-and-higher rates quoted by lenders -- there's an important new financing tool coming your way.
It's called the "Fannie Mae buy-down plan," and it's worth a close look.
A "buy-down" in the mortgage field means a reduction in a loan's interest rate through a lump-sum, advance payment of cash.
A 16 percent mortgage, for example, can be turned into a 13 percent mortgage if someone involved in the transaction pays the lender money to "subsidize" the home buyer's rate for a period of time. The lender still will be getting the 16 percent it requires, but someone other than the buyer will be kicking in 3 percentage points of the rate every month.
Home builders who advertise 11 percent to 13 percent mortgage money in the real estate section every weekend usually have arranged in advance with lenders to buy down their home purchasers' monthly mortgage payment.
A builder who offers consumers a 13 percent rate for the first three years on a $60,000 mortgage, for instance, may have made a lump-sum deposit of over $5,000 with a lender to cover the subsidy. The home buyer pays the bank $664 a month on the 13 percent loan rather than the $807 a month he or she would owe on a 16 percent loan. The $142 subsidy every 30 days amounts to a $5,148 subsidy over the course of three years. Often -- but not always -- the subsidy amount is tacked onto the selling price of the house.
Buy-downs by home builders have become commonplace in major markets across the country during the past 18 months. Far less common, however, have been buy-downs executed by individual home sellers -- or relatives or friends of the purchasers -- as a creative way to enable sales to go through, despite prevailing high rates.
There's no legal reason why the owner of a house that hasn't sold for weeks or months can't offer potential purchasers a buy-down arrangement similar to those offered by home builders.
Nor is there any reason why parents -- who are being asked increasingly to help their children purchase first homes -- can't buy down their kids' monthly mortgage payments with a repayable lump-sum deposit to a lender.
A handful of real estate brokers in some markets have been encouraging sellers to entice purchasers with attractive buy-downs. But lending institutions often balk at dealing with one-time "spot" loan buy-downs on home sales. They don't mind buy-down arrangements with large-volume home builders but haven't been eager to get involved with transactions between individual consumers.
Enter Fannie Mae, the Federal National Mortgage Association. Fannie is the nation's largest home mortgage lender -- it owns nearly $60 billion worth of loans, all purchased from local lending institutions -- and its policies affect the housing-finance market in every state.
Fannie never has purchased mortgages with buy-down agreements attached to them but has just decided to do so in a big way. Fannie now will accept buy-downs made by sellers, builders or others when the mortgage-rate subsidy is no larger than 3 percentage points per year and the subsidy period extends for no more than five years. It will accept "graduated" buy-downs, where the subsidy declines year-by-year during a five-year period, as well as repayable buy-downs secured by second mortgages on the house being financed.
That's excellent news for home builders, for one thing because more local lenders now will be willing to offer such financing plans. But it's also a potentially significant development for anyone currently trying to sell a home -- whether an individual owner or a real estate broker.
Using the Fannie Mae program, a seller can hold out subsidized mortgage-financing as a lure, rather than resort to steep price-cutting. A greater number of purchasers will be able to qualify financially to buy the seller's house at the subsidized interest rate, and a smart seller should be able to tack most or all of his cash subsidy onto the property's selling price. The subsidy would be recoverable in whole or part at the time of settlement from the loan proceeds -- thanks to the higher price charged for the house.
Take a three-bedroom suburban house with a nonassumable loan and no owner-financing as a case in point. The house might sell for a rock-bottom $75,000 -- if at all -- in today's high-rate conventional market. Its potential purchasers would need incomes of over $43,000 to qualify and would have to support a monthly principal and interest payment in excess of $900, at 15 3/4 percent interest and a $7,500 downpayment.
The same house, financed with a three-year, 12 3/4 percent buy-down mortgage purchased by Fannie Mae, could be sold to a family with an income of about $35,000, who could afford to pay the $739 a month for the first three years. The house, with 12 3/4 percent financing attached, might well sell for $82,000 or higher.
More to the point, the house probably would sell -- rather than sit -- thanks to clever use of the buy-down technique.