Seller Credits, Temporary Buydowns, Permanent Buydowns, and Buyer-Paid Commissions

In today’s market, I am seeing more and more buyers ask for seller credits, closing cost credits, rate buydowns, temporary buydowns, and, in some cases, even structuring the buyer’s agent commission differently.

These are not all the same thing.

Some strategies help a buyer ease into the payment. Some reduce the cash needed to close. Some lower the interest rate permanently. Some may create a long-term tax benefit. And some sound great on paper but only make sense in very specific situations. 

First-Time Buyers: Why Seller Credits and Temporary Buydowns Can Be Powerful

For many first-time buyers, the biggest challenge is not always qualifying for the loan. It is getting comfortable with the payment.
A buyer may have good income, good credit, and enough money saved, but the jump into a new mortgage payment can still feel intimidating. That is where a seller credit can be extremely useful.
A seller credit can be used toward closing costs, prepaid items, or, in some cases, to buy down the buyer’s interest rate. The question is: should the buyer use that credit for a temporary buydown, a permanent point buydown, or something else?
My answer depends on the buyer’s situation, but I really like temporary buydowns in the current market. 

What Is a 2/1 Buydown?
A 2/1 buydown temporarily reduces the buyer's payment for the first two years.
For example, if the actual note rate is 6.250%, the buyer's payment may be calculated as if the rate were:

Year 1: 4.250%
Year 2: 5.250%
Year 3 and after: 6.250%

The important thing to understand is that the actual loan is still at the full note rate. The seller buys down the rate for a fee. That money is used each month to cover the difference between the reduced and full payments.
This gives the buyer a lower initial payment, which can be extremely helpful during the first couple of years of homeownership.
New homeowners are often buying furniture, rebuilding reserves, and adjusting to property taxes, Insurance, maintenance, and all the real costs of owning a home. A temporary buydown can give them breathing room.

 What Is a 1/0 Buydown?
A 1/0 buydown is a shorter version.
The buyer gets a reduced payment for the first year only. In year two, the payment goes to the full note rate.
For buyers who expect their income to rise, bonuses to come in, debts to be paid off, or simply want a one-year cushion, a 1/0 buydown can be a clean, simple option.
It is not as aggressive as a 2/1 buydown, but it can still make the first year much more manageable. 

Why I Like Temporary Buydowns
The biggest reason I like temporary buydowns is that the money has a more direct and visible benefit to the buyer.
If a seller pays for a temporary buydown, the buyer receives a scheduled monthly payment subsidy. They know where the money is going. They can see the payment reduction. They can plan around it.
Even better, if the buyer sells or refinances before all the buydown funds are used, the unused funds may be credited back according to the buydown agreement.
That is a big deal.
Why? With a permanent point buydown, the buyer pays upfront to lower the rate for the life of the loan. That can be valuable, but only if the buyer keeps the loan long enough to recover the cost.
If the buyer refinances in 18 months, sells in 2 years, or rates drop quickly, the money spent on permanent points may never fully recoup the cost.

Permanent Buydown: When Do They Make Sense?
A permanent point buydown can make sense when the buyer is confident they will keep the loan for a long time.
Usually, the break-even period is around 4 to 5 years, depending on the cost of the points and the monthly savings. Sometimes it is shorter. Sometimes it is longer.
So if a buyer spends $10,000 on points and saves $200 per month, the break-even period is about 50 months. That is just over four years.
That can be a good deal if the buyer keeps the loan for 7, 8, or 10 years.
But what happens if rates drop and the buyer refinances in two years?
They may have spent $10,000 to save only $4,800. In that case, they did not win.
That is why I am cautious with permanent points unless the math is very clear.

Temporary Buydown vs. Permanent Buydown
Here is the simple way I look at it:
A temporary buydown is best when the buyer wants payment relief now, and there is a realistic chance they may refinance or sell within the next few years.
A permanent buydown is best when the buyer is confident they will keep the loan long enough to pass the break-even point.
A 2/1 buydown is best when the buyer wants the strongest short-term payment relief.
A 1/0 buydown is best when the buyer wants a smaller, simpler first-year cushion.
Permanent points are best for buyers who want long-term savings and do not expect to refinance soon.
In today’s market, with many buyers hoping rates may improve in the future, I often prefer the flexibility of the temporary buydown.

The Buyer Still Has to Qualify for the Full Payment
This part is very important.
A temporary buydown does not mean the buyer qualifies at the lower payment.
The buyer still has to qualify based on the actual note rate and the full payment. The buydown is a payment subsidy, not a way to hide the real payment.
That is actually a good thing.
It means the buyer is being approved based on the payment they will eventually make. The buydown helps them ease into that payment over time.

Now Let's Talk About Buyer-Paid Agent Commissions
This is the opposite side of the spectrum, but it is worth discussing.
I have had several clients lately with larger down payments pay the buyer’s agent’s commission through escrow on the buyer’s side instead of including that commission in the purchase price.
Why would someone do that?
Because lowering the contract price may lower the property tax basis.
For example, instead of buying a home for $1,500,000 with the seller paying a $75,000 buyer-agent commission, a buyer might structure the deal at $1,425,000 and pay the $75,000 commission separately through escrow.
Same economic deal in some ways, but potentially a lower recorded purchase price.
In California, where property taxes are tied closely to the purchase price and reassessed value, that can matter.
If the property tax rate is roughly 1.25%, then reducing the purchase price by $75,000 could save about $937.50 per year in property taxes.
Is that life-changing money? No.
Is it real money? Yes.
That is almost $1,000 per year. Over 10 years, that is close to $10,000 before considering future assessment increases. It may not buy you a vacation home, but it can pay for a little property tax, insurance, maintenance, or something else.
And in real estate, little things add up.

This Strategy Is Not for Every Buyer
This buyer-paid commission structure usually makes more sense for buyers with larger down payments and enough liquidity.
It may not work for every loan type. It may not work for every lender. It may not work in every transaction. It also needs to be disclosed and structured correctly.
You need the buyer's agent, listing agent, lender, escrow, and tax advisor on the same page.
This is not something to casually throw into a contract without checking the details.
But for the right buyer, especially one buying a higher-priced home in California, it is absolutely worth discussing.

The Bigger Point: Structure Matters
Most buyers only look at price and rate.
Smart buyers look at structure.
Should you ask for a seller credit instead of a price reduction?
Should you use that credit for closing costs?
Should you use it for a 2/1 buydown?
Should you use it for a 1/0 buydown?
Should you buy permanent points?
Should you pay the buyer-agent commission separately through escrow to potentially reduce your property tax basis? 

These are not one-size-fits-all answers. The right answer depends on the buyer's cash, income, loan type, time horizon, refinance expectations, property tax situation, appraisal support, and comfort with the future payment. We go through all of these options with buyers, so they have a full understanding of what is available to them. Then we let them decide what is best for their situation. I can’t tell you how many people make mistakes and pay points when they go to the wrong lender.  

Interest Rates
Bad day yesterday! Good day today, but we are limping toward the end. Holiday tomorrow, big signing of a peace treaty, and Monday will be better… I think or hope!    

Loan Programs Snapshot

• Government loans (FHA/VA/USDA): in the 5s –
• Conventional (≤ $832,750): low 6s
• High-balance: mid to high 6s
• Jumbo: Mid 6s
• Bridge Loans 7.75-7.99

Additional options:

• Bank statement loans (10% down+)
• P&L loans (20% down, no bank statements)
• 0% down options (620+ score)
• DSCR loans (15% down)
• Buydowns Available (3/2/1, 2/1, 1/0)
• Private Money loans – Hard Money  
• Construction Loans
• 203K loans
• Commercial Loans
• Fix and Flip Loans  

Rates subject to change without notice.

Condo Update
Good news:

• Treana  –  off the naughty list! 

Bad news:

• Palisades -  25730 Armstrong Stevenson Ranch CA 91381 – Critical repairs   – Deferred maintenance  – reserves  –  Insurance!  Yes, they hit just about every bad thing you can!  LOL! 

We love your Non-Warrantable Condo loans!!
Need help checking a condo? Call me, and we can look it up in real time.

Also:

Full California "naughty list" available here:

https://mikemeena.com/non-warrantable-condos 

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📧 Mike@AugustaFinancial.com

Sincerely,