Builder Financing Incentives: Credits, Points and Rate Buydowns Explained

Builders often prefer to help with financing rather than lower a price. The help can be valuable, but each kind of incentive does something different, and lender rules limit how much of it you can use. Nothing here guarantees any incentive; builders decide what they offer.

The main kinds of incentive

• Closing-cost credit. The builder pays some of your closing costs. It lowers the cash you bring to settlement, but not the price, the loan or the payment.
• Discount points. An upfront payment, usually quoted as a percentage of the loan, that lowers the interest rate for the life of the loan (a permanent buydown). A builder credit can often be used to pay them.
• Temporary buydown. Money set aside to lower your payment for the first year or years. In a 2-1 buydown, the rate is two points lower in year one and one point lower in year two, then the full rate applies.
• Price reduction. Lowers the price, the loan, the payment, the down payment in dollars and the transfer tax.

Lender limits on builder help

Loan programs limit how much an "interested party" such as a builder can contribute. For a conventional loan on a primary residence, Fannie Mae's limits are 3% of the price when the loan is more than 90% of the value, 6% from 75% to 90%, and 9% at 75% or less. Temporary buydown funds from the builder count toward the limit along with closing-cost help. FHA, VA, USDA and jumbo loans have their own rules. A credit can also never exceed your actual closing costs. Credit above either limit is usually lost, so ask whether the builder will convert it to a price reduction or upgrades.

Temporary buydowns: plan for the full payment

A temporary buydown makes the first years cheaper, then the payment rises. Fannie Mae requires lenders to qualify you at the full note rate, not the bought-down rate, and you should budget the same way. A temporary buydown is most useful when you have a specific reason to want lower early payments.

How to compare incentives

Put each option on the same basis:

1. the purchase price after any reduction;
2. cash to close, after usable credits;
3. the monthly payment in year one and after any buydown ends;
4. the total cost over the years you expect to own the home.

Our builder offer comparison does this for up to four offers, including points and temporary buydowns, and applies the conventional contribution limits.

Get the lender's figures in writing

Incentives tied to the builder's affiliated lender should be compared with a written Loan Estimate from at least one outside lender. The Loan Estimate is a standard form, which makes the rate, points and fees easy to compare line by line. See comparing the builder's lender with an outside lender.