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The 3-2-1 of making homes affordable

The 3-2-1 of making homes affordable

Last week, Zillow reported that Orange and L.A. counties are the third costliest housing markets for homebuyers in the country.

It’s time to dust-off a fabulous financial instrument that we used in the olden days to improve affordability and get more buyers into homes they want. It’s called a 3-2-1 buy-down or temporary rate buy-down.

This reduced initial payment fits well for buyers with capacity for higher earnings in the first few years of obtaining a mortgage, and it has a predictable payment increase, according to Freddie Mac’s website.

Here’s how it works. The seller subsidizes a reduced interest rate and payment for the first three years of the buyers’ 30-year fixed rate mortgage. The subsidy reduces rates to a maximum of 3 percent below the actual note rate.

This is done by paying dollar for dollar the amount of the reduced payments for those first three years through a seller concession at closing.

Here’s an example. Let’s say the borrower can get a 30-year, $ 400,000 no-cost loan at 3.875 percent. The payment is $ 1,880. The seller paid 3-2-1 buy-down reduces the starting payment to 0.875 percent with a principal and interest payment of $ 1,263.

That’s a whopping savings of $ 617 a month, or $ 7,404 added up for the year.

The rate for months 13 through 24 is 1.875 percent and the amortized payment equals $ 1,453. That’s a savings of $ 427 a month, for a second year savings of $ 5,124.

In months 25 through 36, the rate is 2.875, with payments of $ 1,659. That’s a savings of $ 220 per month, with savings totaling $ 2,640 for the year.

Now, we have to add up those three years of buy-down payment savings, which is how we determine the dollar amount of the seller concession.

Year one is $ 7,404, year two is $ 5,124, year three is $ 2,640, which totals $ 15,168.

Fannie Mae and Freddie Mac limit seller concessions to three percent of the sales price if you are putting less than 10 percent down, 6 percent when putting 10 percent to 24.99 percent down, and 9 percent when putting at least 25 percent or more down.

The Federal Housing Administration allows sellers to pay up to 6 percent in concessions.

Qualifying is another important point. You must qualify at the highest interest rate (the note rate) and payment.

Get yourself pre-approved using Fannie Mae’s Desktop Underwriter or Freddie Mac’s Loan Prospector System. Either system can approve FHA loans.

Freddie Mac and FHA allow non-occupant co-borrowers should you be short of qualifying income.

Mortgage broker Jeff Lazerson can be reached at 949-334-2424 or jlazerson@mortgagegrader.com. Twitter: @mortgagegrader_

The Orange County Register – News Headlines : Real Estate News