Talk About Buydowns
By Regina Uhl, Partner, November 14, 2022
We are fielding a lot a questions about buydowns lately. Unless the buydown is contractual (part of the note), it is not reflected in the rate or payment stream (on the Note or CD). Most buydowns we are seeing are not a contractual buydown. This type of buydown is a side deal to fund a portion of the payments that the borrower is contractually obligated to pay under the Note. The main disclosure is the amount of funds to establish the buydown escrow account.
The Official Commentary to TRID specifies a particular place on the CD for seller paid buydown amounts (Lines L.05 and N.08). However, no specific place is promulgated for lender-paid buydown amounts.
A buydown agreement will be prepared for closing. It shows the effective rate(s) utilizing the buydown funds, year(s) and how much money comes from the buydown account to supplement the monthly payment.
Example of a 2/1 noncontractual Buydown scenario:
Note rate 8.000%, Loan amount $500,000.00. P&I on Note: $3,668.82/mo
Buydown schedule/funds:
Year 1: Assuming a 6.000% P&I: $2,997.75 (Difference between Note rate P&I ($3,668.82) and Year 1 P&I ($2,997.75) = $671.07 x 12 = $8,052.84 (funds escrowed)
Year 2: Assuming a 7.000% P&I: $3,326.51 (Difference between Note rate P&I ($3,668.82) and Year 2 P&I ($3,326.51) = $342.31 x 12 = $4,107.72 (funds escrowed)
Total buydown funds in escrow: $12,160.56 (can be paid by borrower, lender, seller, other, or combination of any of the foregoing, disclosed in Temporary Buydown Agreement in closing package).
Funds go into the buydown escrow account and are drawn according to schedule to meet the full P&I payment under the Note for the period proscribed. Another way to think about it, this type of buydown agreement is when some party is prepaying a lump sum into an escrow account that will contribute to some portion of the monthly P&I payment for the first 1 or 2 years of the loan.
Contact us if you have more questions about buydowns.