Simply put, you are approved for a specific monthly payment amount, which translates to a maximum mortgage amount based in part on the current interest rate. When you reduce the interest rate, the amount of money going to interest is less at the same payment amount. That means more of the payment can go toward principal, which in turn means a higher maximum mortgage amount, or a far lower monthly payment, or a combination of both.
As the buyer, you are restricted by law to contributing a maximum of seven points to the buy down. Any funds you contribute over seven points will go to buying down the principal. The seller may contribute up to ten points. One of the unique parts of the NACA program is that if your income is below 100% of the median income for your area, the bank will match any amount you have available OVER the seven point limit and contribute it toward the interest rate buy down. With those tools you may buy the interest rate down to 0.0625% for Citi. Yes this is a FIXED interest rate.
For a 30-year loan, one point (1% of the mortgage amount) reduces the interest rate by 0.25%.
For a 15-year loan, one point reduces the interest rate by 0.5%.
Here are all the long-winded details:
The member (Buyer) may only contribute a maximum of seven points and the seller may only contribute a maximum of ten points.
NACA Interest Rate Buy Down, HOEPA limitations and Participating Lender Grants
NACA Interest Rate Buy Down:
1% of the loan amount (also called “one point”) reduces the borrower’s interest rate by 0.25% for a 30-year loan. One point reduces the borrower’s interest rate by 0.50% for a 15-year loan.
Example: Loan amount is $120,000. Interest rate for the day of application is 4%
One point = $1,200. Two points = $2,400. Three points = $3600 and so on. $1,200 to interest rate buy down get to a new rate of 3.75% for a 30 year loan and 3.50% for a 15 year loan; $2,400 to interest rate buy down gets to a new rate of 3.5% for the 30 and 3.0% for the 15; $3,600 to interest rate buy down gets a new rate of 3.25% for the thirty and 2.5% for the 15, and so on.
The Home Ownership Equity Protection Act (HOEPA) limits the total points and fees which can be contributed by the buyer to 7% of the loan amount (7 points) total.
Note: There is no limit to the amount that a NACA Member can contribute to reduce the loan amount (down payment, principal reduction). After 7% of the loan amount goes to interest rate reduction, the Member’s contribution will reduce the loan amount.
NACA Program Lender Grant: Low and moderate income Members qualify for a lender Grant thus the interest rate buy down is not limited.
Low and moderate income for purposes of the lender grant within the NACA program is defined as 100% or below the Metropolitan Statistical Area (MSA) median income for the area the Member purchases as documented by the Federal Financial Institutions Examinations Council (FFIEC). The website to check the median income for the NACA Member and determine what is the track median income for the property that is being purchased is:
Note: The income used in determining lender grant eligibility is all income included on the bank application.
Citi Mortgage Lender Grant Formula:
7% of the loan amount minus $500 Hand fee when funds are held to complete repairs after closing equals the total amount of Member funds to interest rate buy down. For members that qualify for the grant additional funds will be diverted to principal reduction and the lender will match the funds in interest rate buy down. The interest rate can be bought down in increments of .0625% (quarter points/one-eighth points) to a final interest rate of .0625%
Example for CitiMortgage:
The Member is contracted to purchase a house for $100,000. The starting interest rate is 4%. There is no escrow for repairs. The Member wants to put $8,000 to interest rate buy down and is at 75% of the median income.
For a 30 year loan, $8,000 buys the rate from 4% to 2%
Seven points ($7,000) from the Member can go to interest rate reduction. The eighth point ($1,000) goes to principal reduction, and the lender contributes a matching $1000 toward interest rate reduction. The loan amount will be $99,000 with an interest rate of 2%.
If in the same example, the Member was over 100% of the median income, the same $8000 would result in a loan amount of $99,000 but no lender grant match to further reduce the interest rate so the final interest rate is 2.25%.
For a 15 year loan, seven points ($7,000) from the Member can go to interest rate reduction. The eighth point ($1,000) goes to principal reduction, and the lender contributes a matching $875 toward interest rate reduction. The loan amount will be $99,000 with an interest rate of 0.0625%.
If in the same example, the Member was over 100% of the median income, the same $8000 would result in a loan amount of $99,000 but no lender grant match to further reduce the interest rate so the final interest rate is 0.50%.