Real Estate and Home Mortgages - Utah 2-1 Buy Down Mortgage...Good Move?

My husband and I are looking at our mortgage options for our first home. I am currently a college student, and my estimated graduation date is in the spring. Until then, my husband is the sole provider for our family. We are in a pinch to buy before Christmas because our lease terminates at the first of the year, and there are no short-term lease options in the area we want to live in. So, in order to buy in the afformantioned area, we would need to get a mortgage for 115,000 to 120,000. That sounds easy, but with our current income, we can only afford about $650 a month for the mortgage. With our current credit scores, an FHA loan would get us about a 7.125% interest rate, which means, to get the desired payment, we would have to find something for less than 80,000. Impossible. Our realtor hooked us up with a Century 21 mortgage consultant, and he suggested a Utah Housing 2-1 Buy Down. The way he explained it is that, for the first year, our interest rate would be 4.5%, putting our payments whare we want them. Then, for the second year, the rate would be 5.5%, which is fine because I will have my degree by that point and be able to contribute financially. Then, from the third year for the rest of the loan, our rate would be 6.5%. Is this a too-good-to-be-true situation? Because, if this is really how this works, then it sounds great. But, if it is not, I don't want to get screwed over. Anyone who knows anything about Utah mortgage practices, PLEASE HELP!!!

I'm not familiar what-so-ever about the "Utah 2-1 buydown", however the basic 2-1 buydown works the same way.

On a 2-1 buydown, basically, you are buying down the interest rate on your mortgage. The initial interest rate on your mortgage is reduced by 2% the first year and 1% the next year.

Keep in mind you are paying for the buydown. Did the mortgage consultant inform you about this and what the cost is? The costs that will be charged generally equal the savings in the lower payment. However, the seller or lender (when you find one) can pay for the buydown.

When you say you can afford $650/mo. for the mortgage, are you including hazard, tax and/or mortgage insurance? How much $$$ are you putting down?

On a personal level, (not to say you won't get your degree by then) but I wouldn't count on something you don't have yet. Things can happen...good or bad. Now if your hubby has potential for increased income or you both have substantial assets available to cushion the effect of the increased payments, then I would count on that.

When in doubt about the Utah 2-1 buydown, be sure you read and understand the Note and/or all the forms you sign.

Hope this helps some.

Check back as I'm sure others will chime in here. ;)

I am so glad you came here with this question!

I do not agree with buydown loans, especially in your situation. They are almost as insidious as the adjustable rate mortgages (ARM's) that are part of the downfall of the mortgage industry lately. Utah happens to be one of the states with the highest level of mortgage fraud, by the way. I'm not insulting you or your state, just be careful what advice you get--especially when the mortgage company is part of a real estate brokering company. That goes for C21 and any others. You need an independent to give you advice, and someone **local** to be familiar with all of your state-specific options. A quick search brought me to your state's site:

http://b2b.utahhousingcorp.org/cgi-bin/R?P=uhc_home.html

...and a brochure about programs. I don't see any "Utah 2-1 Buydown" on here, but maybe there's something else not shown. It sounds like a typical buydown that just guarantees that your rate/payment will go up for the next 2 years.
Brochure:
http://b2b.utahhousingcorp.org/PDF/fh_brochure.pdf

As for that interest rate, 7.125%,that is absolutely horrible. You either qualify for an FHA or you do NOT. FHA loans are NOT SCORE BASED. You should be finding a rate in the neighborhood of 6.25% with no points or origination fee right now. This person is using your credit issues as an EXCUSE to charge a higher rate to make more money off of you. That is not ethical. You need to go elsewhere without so much as giving them a second chance. This person is undermining the entire purpose of the FHA loan.

I suggest looking at that pdf I linked to. It shows a FirstHome program that is VERY similar to something we use in MS. It's based on an FHA loan, has a good interest rate and is designed for people in your situation--without the ridiculous buydown that I think you would regret.

There is on that pamphlet a list of participating lenders that you can contact. Surprise surprise, C21 is not listed. That's why you go with local banks and brokers--they know what you really have available to you.

Please do yourself a favor and walk away from the person you're talking to. They're trying to take advantage of you and they do not know the options you have available to you.

On the subject of your payment preference:
do not make the mistake that many in foreclosure now made. Don't force a bad loan to get your payment down. Lower your loan amount by downsizing the house, looking at different areas for cheaper values, or put more money down. These gimmick loans have ruined many lives. You plan to be working in a couple of years, but what if you can't? Or your husband can't? Or someone gets ill and can't earn a living for a few months? Bad things happen to good people, and it doesn't take as much as you think to ruin the next few years of your lives, financially. Be conservative. No one bought houses in these last few years with the intention of being foreclosed on, and they are not bad people who don't care.

So, you do a solid budget. I mean EVERYTHING. How much do you spend on utilities, sure, but also on movie rentals, eating out, driving through, dry cleaning, car insurance, gas, oil changes, groceries, stopping at a convenience store for a Coke, tires....all of it. How much can you afford for the house note? Now add $100 to that for the "house things" that pop up every month it seems. Gotta buy appliances too, lawn mower, edger...Do you have your life insurance yet? You should.

We're not done! Don't give up!
Now look for ways to save money. Do you need that many clothes dry cleaned, or can you iron some? Can you take your lunch to work instead of eating out so much? Stop going to starbucks and get a bunch of disposable coffee cups at the grocery store and make your own coffee ( :coffee: I gave up on the plastic ones to wash, they get left all over the place and lost! LOL). How about your car insurance? Are you 25? It should drop. Shop around to see if you can lower it if you have no claims or tickets in the last 3 years. Have a soup/sandwich night(s) during the week instead of cooking or eating out. Get rid of any credit cards, MAYBE keep 1 visa/mc (just don't use it ;)), but NEVER get a store credit card--they're useless anywhere but that store, have high rates, and you spend too much money with those cards. Subscriptions and auto drafts: look at your cell phone, cable, and anything else. These days it seems like everything is "just" $20 extra a month. That adds up. See what you can drop or at least cut back. Take that savings and add it to the note you figured you could afford after the first part of your budget. A nicer house is worth a lot more than keeping some of the things you're used to right now.

Now we take that 5.9% rate your state program is offering, that payment you can afford and THEN arrive at the loan amount you should be looking for. Not the other way around. Then start shopping for a house you know is in your price range **as your financial situation is right now** not how you hope it will be in a year or two.


Check back if you have questions, I want to hear how it goes with that Firsthome program. Our similar program here is a HUGE benefit for first time buyers. :thumbup:

Hey Bill,

Most excellent advice and explanation as always. :)

Speaking kind of on the subject of FHA, have you read or seen or heard this on FHA's planned implementation?

http://hudclips.org/sub_nonhud/cgi/pdf/4651a.pdf

Very interesting stuff.

Yes, somewhat. We talked about that yesterday (con't ed class, HUD taught most of it). They did not have that sheet with them though. There are parts of the reform that are very good, but that risk based PMI is not a great idea--I see that getting blown out and rates going up too high eventually, ruining the whole program. I think this would be in place of the UFMIP, so it's not that bad for now, but I'd worry about changes in the long term. The minimum score is a bad idea, and basing this on source of funds is not a good idea for the target borrowers for this loan type. Gift funds are a staple of FHA loans.

*However, they are also considering significantly increasing the FHA loan limits to make that loan an option in higher cost areas again. (VERY good)
*Also, condos would not be treated differently than single family residences (good)
*No cap on reverse mortgages (not popular here, so no idea if that's good or not)

VERY BAD:
Increasing max loan term to 40 years. This is terrible and irresponsible. It blows my mind that in a time of crashing markets due to irresponsible lending and gimmick loans that they would consider this. 30 years is bad enough, but going to 40 is insane. The monthly savings aren't even that great considering you're adding 10 YEARS to the note.

Too many negatives, IMO. I'd rather change nothing than allow the negatives to go through.

Check out my sticky on the FHA Secure. That could be a good thing, but there may be catches with credit requirements, IMO.

I totally agree. We made a call in to HUD yesterday and they had an early morning conference about this. The people there didn't agree with the planned implementation. Even though it's a "planned" implementation, I'm afraid it would come into effect next year. We are trying to get everyone we know in the business to send them a comment on how bad this implementation would be. The person at HUD suggested this.

It IS great if the loan limits increase :thumbup: .

There's definitely too many negatives like you stated.

The FHA Secure program is excellent. I was jumping for joy and it would be great for those that need the help. However, here in CA it seems the hard part would be having sufficient equity in the home as many of the homeowners bought their house w/no down payment and the values of homes aren't increasing. :( It IS definitely a great program though.

You should go work for HUD :D ;)

I think the equity issue will prevent many from using it, but also the credit issue. They aren't planning to make any credit exceptions beyond the norm at this point. Most people that get behind on their house let other things go too. It's still worth it for people to try to get the program to work, but I think it'll take a lot of manual underwriting with compensating factors and documenting late payments of other debts coinciding with the rate increases for it to work. They need to release a letter to that effect.

Thank you all so much for all the advice. We have decided to walk away from the guy that was trying to give us the buy down. It was far too complicated and did not feel secure at all. We are getting an FHA loan at the rate it's supposed to be (6.125%), and we've decided to buy a property that is in need of a lot of cosmetic repair. The cost is much lower, and I know how to do a lot of home improvement stuff, so we're getting more house for our money, and it will be something we can stay in for a while. We also have a home inspection lined up to make sure we're not buying a beater. I'm so glad I brought this question to you guys. All of the responses are very helpful. Thanks again, everyone.