Buy down cap explained below. Bank of America Lender Grant Formula:
7% of the loan amount minus $3,000 (loan origination paid by the lender) minus the HAND fee (3% of the amount held for repairs) equals the total maximum allowable Member contribution to interest rate buy down. For members that qualify for the grant, additional funds contributed will be diverted to principal reduction and the lender will match the amount in interest rate buy down. The interest rate can be bought down in increments of .125% (half points) to a final interest rate of .125%
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.
$8,000 buys the rate from 4% to 2%
The maximum contribution to points is 7% or $7,000
$7,000 – $3000 = $4000 ($4,000 is the highest amount the Member can put to interest rate reduction)
$4,000 of the Members money will go to interest rate buy down and the other $4000 will go to principal reduction creating a new loan amount of $96,000 rather than $100,000.
The lender will match the $4000 and offer the final 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 $96,000 but no lender grant match to reduce the interest rate so the final interest rate is 3%.
As you can see, there is no 4% cap, but you can probably see how some people might misinterpret it that way.
The buy down cap can be confusing. I hope this clears that up. If not, feel free to contact us. We would love to clear it up further.