Closing Cost Credit Strategy

I’m receiving $18,000 in closing cost credits, which I could use for a permanent rate buy-down. Given current rates, would it be more beneficial to apply these funds toward a permanent buy-down, or would it be smarter to increase my down payment and use the remaining credits for a temporary rate buy-down?

Seller credit can’t go towards the down payment. If the $18k can cover all of your closing costs, you can use the excess to buy down the rate. I’d avoid temporary buydowns, there’s no point in letting the bank manage an escrow account with your money in it when you could just have more cash on hand to supplement the payment or invest.

If there is excess seller credit and there is absolutely nowhere it can be applied to, I’d use that to buy the rate down permanently.

@Zan
I think in the case of a seller concession a temp buy down is better. It’s not actual cash that you’ll ever have access to, but drastically lowering your monthly payment means you will have more capital every month that you can invest or pay down principal.

Especially as rates may drop in the future and that, any permanent buy down goes to waste. But the unused temp buy down can be applied towards the principal in the refinance.

@Nico
Sure, but the chances of the credit covering all closing costs AND the entirety of a temp buydown is low. If you’re putting any of your own money in to the transaction just so it’s enough for a temp buydown is more often than not a bad idea.

Hard to know for sure without knowing the purchase price, but if it’s $600k with 20% down, you need $3,767 in excess credit after all costs are paid just for a 1-0 buydown. 2-1 you’d need $11k.

@Zan
Ahh from that perspective it makes more sense. I was coming at from the angle of the credits fully covering the cost of the buy down.

I’m in a similar situation. I have $26k credits, my closing costs are like $5k and the bank won’t let me buy down more points than 3% of the purchase price (approx $10k) otherwise it becomes subject to predatory lending. That leaves me with approx $11k I need to use.

@Nico
Did they apply the credit to prepaids already? If you have mortgage insurance you could potentially use it to pay that off. In your case the temp buydown makes perfect sense.

Zan said:
@Nico
Did they apply the credit to prepaids already? If you have mortgage insurance you could potentially use it to pay that off. In your case the temp buydown makes perfect sense.

I don’t have PMI as I’m doing 20% down.
Unfortunately, the bank doesn’t offer temp buy downs (none of the major lenders seem to) so I’m trying to find prepaids to use the $11k remaining.

@Nico
Sellers won’t reduce price and credit?

Zan said:
@Nico
Sellers won’t reduce price and credit?

It’s a co-op. The board will not let the unit sell for a lower price.

There are some repairs that need to be done which is where the concession came from, but my LO and Attorney both said it can only be applied to closing costs and prepaid. I won’t ever receive actual check for the amount, which is what both agents told me would happen.

@Nico
I’d touch base with your attorney to see if you can form an agreement with the seller to be able to get you the money outside of closing potentially. It’s risky because the sellers may not actually be obligated to do it, but it might be worth the risk if the money will be lost anyway.

I’d keep the credit in tact to pay for all of your closing costs and prepaids, and then try the above route.

@Zan
TBH I don’t care whether I have the cash in hand, or it gets rolled into other costs as it all nets out the same to me.

My lender suggested I could pre-pay like a year’s worth of the monthly maintenance and count it as a prepaid item.

@Nico
>That leaves me with approx $11k I need to use.

You could lower your loan amount by ~$11,000.

Indigo said:
@Nico
>That leaves me with approx $11k I need to use.

You could lower your loan amount by ~$11,000.

The co-op board won’t let the purchase price be any lower (which is why the seller offered the concession).

@Nico
The purchase price stays the same, you reduce the loan amount. Standard loan requirement when the credit exceeds the closing costs.

Indigo said:
@Nico
The purchase price stays the same, you reduce the loan amount. Standard loan requirement when the credit exceeds the closing costs.

How do we reduce the loan amount? My understanding is that seller concession can’t be applied to the down payment

@Nico
While it may look that way on paper, it isn’t. If you put down 20%, then your goal LTV is 80%.

The formula for 80LTV is:

Loan Amount = (Purchase Price - Sales Concession) * 0.8

To maintain 80% LTV you have to lower your loan amount.

Essentially: LTV= Loan Amount / (Purchase Price - Sales Concession)

@Indigo
My lender was saying we couldn’t do that and that it would actually mean I have to bring a higher down payment (made no sense to me).

Spoke to a different lender who said we could do that.

@Zan
Yup. They can also buy down PMI with a seller credit (assuming they are putting less than 20% down)which would save them that extra monthly payment

@Zan
This is it! Find a way to spend all 18k on the closing costs. Single MI, permanent buydown, everyone is saying you will lose the money but none of us have any clue what is going to happen with rates.

Use $18k toward closing cost and the rest into down payment.

Don’t buy down points. If the rate falls down in the future (1-5) years, your will lose that money you used to buy down.