By Ronnie Rushing of Echo Home Loans and member of CCAR's REALTOR® and Lender Committee.
Make sure you are using all the programs that are available for your clients. When you arm yourself with more knowledge of the wide range of loan options that are available for buyers, you can provide better service to your clients. This will help you close more deals and get more clients into their dream home! This month we will talk about the 2-1 Buydown loan and a couple of the great non-QM loans that are available.
2-1 Buydown Loans
To put it in very basic terms, a buydown loan is simply a loan where the buyer (or other interested party) is paying discount points to temporarily reduce the interest rate at the start of the loan. This is best seen by way of example: for a 2-1 Buydown loan, the interest rate on the loan will be reduced by 2% for the first year, then by 1% in the second year, and it will revert to the buyer’s qualifying rate in the third year. The cost is typically 3% in discount points. At a typical rate in today’s market of 5.5%, the buyer would be paying at 3.5% rate for the first year and then 4.5% rate for the second year. This is extremely powerful and it saves the buyer thousands of dollars in the first two years.
Buydown loans are great options in an increasing rate environment (like today!) and also help buyers that are expecting to have greater income or lower costs a couple of years down the road.
One final hint: Sellers can cover the cost of the buydown, too! This is a very enticing concession that allows the seller to offer value to the buyer, but without having to reduce the purchase price of the home. Make sure to mention it to your sellers in this slowing market as an extra tool in their bag!
Non-QM loans got a bit of a bad name in the past, with shady practices and early payoff penalties that often did more harm than good. But in the post-Great Recession and Dodd-Frank era, there are many strong options out there that are designed for buyers or properties that do not qualify under the standard Qualifying Mortgage guidelines.
For instance, Jumbo loans are technically non-QM loans. Did you know that? Any loan amount that exceeds the Fannie/Freddie cap ($647,200 for 2022) is no longer a QM loan and therefore it is always manually underwritten. Great product, but not a QM loan.
A couple of my other favorites: Bank Statement loans and DSCR loans. Bank statement loans are specifically designed for the Self-Employed buyer that has strong cash flow in their business or personal income, but their taxable income is too low to qualify for the home. This program calculates their income based on the qualifying deposits from their bank statements (typically for a 12-month time period), and many times it helps them qualify for much more than a QM loan will allow. Interest rates for these loans can run anywhere from 1-3% higher than QM mortgages, but for buyers with strong credit profiles, this is a fantastic loan option.
For investors, the DSCR loan is a great option. DSCR is short for Debt Service Coverage Ratio, which is a very confusing way of saying that the market rent you will make on the investment property qualifies the home for you. With a qualifying appraisal to prove the expected rental income on the property, the investor just needs to have good credit and funds to close (typically 20% down for these investor-specific loans). The interest rate will also be about 2-3% higher than the QM market rates, but for investors who don’t want the hassle of income qualification, this is a really good choice.
As always, it is so powerful to know all these options, it will help you serve your clients better and get them into homes!
For more information on this or other lending-related topics, please contact any member of CCAR's REALTOR® & Lender Committee at RealtorLender@ccar.net.