Understanding Builder Incentives and How to Navigate the Offers

Written by Lesley Guerrero | Mortgage Knowledge Made Simple

Chief Operating Officer | Mortgage Loan Originator at Mission Mortgage-NMLS #1615801

Helping Texans make smarter home financing decisions through practical mortgage education.

Unpopular opinion: It is a really good time to buy a home, particularly new construction

Across the country, builders are offering incredible incentives to entice buyers to move forward, even in a “higher than we’d like” interest rate environment.  But, how do you know what is real and what is too good to be true?  Let me break down some of the most common advertisements that you will see.

Interest rate buydowns through a “forward commitment”

What does that even mean?  It’s actually a smart strategy.  A builder may work with a lender partner to secure favorable pricing for a large pool of funds- often moving swiftly on a great market day.  The builder may then start offering that favorable pricing to eligible buyers – using that lender only.  Think of it as stocking up while something is on sale.  Builders may do that with a pool of funds that they then offer as an incentive for specific loan programs or homes.  The funds are limited and once they’re gone, they’re gone.

Mortgage Tip:  Forward commitments are often used in combination with certain homes which are already built or near completion, rather than a home not yet built.  Be sure to ask.  Also, the special rate may only apply to one loan program, not all.  Be sure to compare loan programs and choose what is best for you, which is not always the lowest rate.

Interest rate buydowns through “points”

A builder may offer to pay points to help a buyer obtain a better rate.  But what exactly is a point?  A point is 1% of the loan amount.  If you are looking at a $450,000 sales price and putting 10% down, the loan amount would be $405,000 and one point would be $4,050.  The point(s) may be used to obtain a lower than market interest rate. The builder may limit who they will pay those points to, often their preferred lender.  Buyers are generally free to choose another lender, but those incentives may not be transferrable. (Now is the time that loan officers will come in with the “but that’s not fair” chorus.  It is fair, and it is compliant, and legal, we just don’t like losing a client to another lender, womp womp.)

Temporary buydowns

You may see an amazing rate and think, “wait, how is that possible, the news said rates are high?”  It very well may be a temporary buydown, always read the fine print.  A 2-1 buydown means that a buyer’s monthly payment is calculated on a rate which is 2% lower than the actual rate during the first year, 1% lower the second year, and at year 3, it will be calculated at the full interest rate.  Example: 3.75% first year, 4.75% second year, and 5.75% for the life of the loan.  The seller  will fund this buydown on your behalf.  Would you like to know something cool?  Depending on the terms of the buydown agreement, if you sell or refinance, any unused buydown funds may yours and may be applied to your principal balance.

What I like to call “Combo Platter” incentives

Nod to my colleague Debbie who coined the phrase and summarizes it perfectly.  A little of this a little of that.  Rate buydown, deco incentives, closing cost incentives, appliances, blinds, cowboy pools, etc.  Builders get creative trying to find the exact right thing that will appeal to new homebuyers.

I will say this loudly for the people in the back

Know before you go- check the reputation of the builders in the subdivisions that you are interested in. Do a little research online.  Know their product, know the builder, and have your real estate agent with you when you go for the very first time.  This is a biggie, a real estate agent who is trained in new home construction is worth their weight in gold. They can help you navigate a complex contract.  Your real estate agent works for YOU not the builder.  A builder’s sales agent works for…well, the builder, of course!

Full disclosure, I work for a company which specializes in new construction lending.  My perspective on timing in the market is my own.  I have seen incentives being offered that I have never before seen in my career.

Disclaimer:  Your mileage may vary.  Guidelines change.  Talk to your mortgage professional.

Tags:  FHA, Conventional, Buydowns, New Construction, First Time Homebuyer, Homebuying Tips

About the Author

Mission Mortgage of Texas, Inc.

Your mortgage journey begins here. Getting started on the purchase or refinance of your home is just a few minutes away. No commitment needed.

Specializes in: Conventional, FHA, Non-QM

Licensed in: TX

→ Contact → (512) 3280-400

Company NMLS #207583