Seller-Paid “Temporary Buydowns” vs. Seller-Paid Closing Costs; Limits? What About Commissions?

A seasoned agent asked me these excellent questions today:

1. Is there a different limit for a seller-paid “temporary rate buydown” vs seller-paid credit for closing costs? No, but see below for the explanation.
2. Can a seller pay for a buyer’s “temporary rate buydown” in addition to a closing cost credit? Yes, but see below.
3. What is the limit a seller can contribute? It varies; see below.
4. Are the guidelines and limits different for jumbo, conventional, and FHA? Yes, see below once again.

A Few Reminders

1. Closing cost credits can be for non-recurring or recurring closing costs. Non-recurring closing costs are one-time fees like title insurance, escrow fees, appraisal fees, etc. Recurring closing costs are costs that recur every month, such as interest, property taxes, and homeowner’s insurance.
2. Permanent rate buydowns involve paying points to permanently buy down an interest rate. One point or 1% of the loan amount typically buys down a rate by about 1/4%.
3. Temporary rate buydowns: A 3-2-1 buydown works like this: The buyer’s interest rate in year 1 is 3% below today’s market rate; 2% below market in year 2; and 1% below market in year 3.
   So, if today’s market rate is 7%, with a 3-2-1 buydown, the rate in the first year would be only 4%!
   Only sellers can pay for temporary buydowns though. And, once again, buyers get the buydown funds refunded if they refinance (very likely) before the buydown period ends.
   I wrote two blogs about buydowns that I recommend for much more detailed info:
   The Beauty of Buydowns To Lower Payments and Save Deals!
   3-2-1 Buydowns Are Not the New Option ARM!
4. Buyers are NOT allowed to pay for temporary buydowns, but they can pay for permanent buydowns.
   
5. Both temporary and permanent buydowns are “closing costs” in the eyes of lenders – and thus subject to the same overall closing cost credit limits. So sellers CAN pay for temporary buydowns as well as other closing costs, as they are all one and the same.
6. Interested party contributions or IPCs, per Fannie Mae, “are costs that are normally the responsibility of the property purchaser that are paid directly or indirectly by someone else [like the seller] who has a financial interest in, or can influence the terms and the sale or transfer of, the subject property.” This is the where the “limits” for the amount of contributions come from.

What Are the Limits?

1. FANNIE MAE & FREDDIE MAC: The limits for conforming loans are (1) 3% of the purchase price if the down payment is less than 10%; (2) 6% of the purchase price if the down payment is 10% to 24.99%; and (3) 9% if the down payment is more 25% or more.
2. FHA: The limit is 6% of the purchase price.
3. JUMBO: Most jumbo lenders cap credits at 3%, but some follow the Fannie/Freddie guidelines set out above.
4. INVESTMENT PROPERTIES: The limit for investment properties is usually 2%.

How Often Do Seller Credits Bump up to or Exceed Limits?

It is very rare that we see closing cost credits exceed these limits, but they could if sellers are crediting for a temporary buydown (which can be expensive) on top of other closing costs – particularly if there are significant transfer taxes involved.

What if Sellers Have to Start Offering Credits for Buyer’s Agent Commissions Too?

This will not impact the closing cost or IPC limits discussed above, as credits for commissions are not considered IPCs – as I explained in this blog: Fannie & Freddie Supporting Agent Commissions, But…Has Anything Changed?