Seller Funded Buydown

As Interest Rates Rise, Seller Buydowns are Making a Big Comeback. Here Is What You Need to Know!

HOME BUYING

Mello Funding

12/8/20232 min read

A Seller-Funded Buydown can temporarily reduce the mortgage payment for the borrower. This happens because the seller offers a credit that pays the difference between the full P&I payment and the reduced P&I payment. The seller only needs to provide the credit, and the lender handles supplementing the payment. So, it’s a seller credit used differently!

What is a Seller-Funded Buydown?

Here's an example

Interest Rate is 7%
Loan Amount is $250,000
P&I at $250,000 with a rate of 7% is equal to $1663/month

If a Seller offers a credit, this amount can be applied to buydown the 1st, 2nd, or 3rd-year payment, depending on the credit amount.

Suppose a seller agrees to supplement the payment difference for years one and two.
The note rate is still 7% for 30 years. However, because the seller provides a credit, the lender will use that credit to make up the difference between the note rate payment of 7% and a reduced payment for the term of the buydown.

The first-year payment for the borrower is calculated at a rate of 5%.
The second-year payment for the borrower is calculated at a rate of 6%.
Years 3-30 would be the note rate of 7%.

Borrower - Year One @5% = $1342 - P&I/Month
Borrower - Year Two @6% = $1498 - P&I/Month

The difference between the Note Payment of $1663 and Yr. One of $1342 is $321/Month.
The difference between the Note Payment of $1663 and Yr. Two of $1498 is $165/Month.

If the Seller offers a subsidy of $321 x 12 = $3852 (for 1st year) plus $165 x 12 = $1980 (for 2nd year), they will offer the borrower a total subsidy of $5832 which would pay for the payment difference the first two years.

This strategy helps a homebuyer ease into their house payment and frees up funds for other things that would have normally gone to a house payment.
NOTE: Seller credit cannot exceed the maximum seller contribution for the program selected.