Friday, October 12, 2007

PITI Payment Abatement Program

In my July 2007 article,"Payment Abatement: What the Heck is That?", I wrote about a payment abatement program where the sellers can pay for the interest portion of the buyers mortgage payment for up to the first 6 months of the loan. The buyers were still responsible for the principal payments (if it was not an interest-only loan) and the escrows payments.

Now, on certain Fannie Mae loans, we offer a PITI Payment Abatement Program. For up to 6 months, the seller can pay the buyers entire payment which includes principal, interest, taxes and insurance (homeowners insurance, mortgage insurance, and flood insurance, if required).

Many sellers, and especially builders, are finding that they are having a hard time getting buyers to look at their properties, let alone purchase them. Sellers often offer incentives such as free home warranties, paying points for the buyer, etc. Builders are making even bigger offers to buyers such as free upgrades, free basements, finished basements, etc. I even heard of a builder offering the chance for a buyer to win a BMW SUV!

When these incentives fail to attract the right buyer to the property, the sellers or builders will typically reduce the sales price low enough to attract buyers ahead of other properties. The problem with this is everyone loses. The sellers make less money on the sale of the home. The buyer purchases a home at a low price, thinking he is getting a great deal. However, when this happens, the value of all homes in the community falls, thus, impacting all homeowners in the area, not just the buyer and seller.

Payment Abatement Can Help You Sell Faster

With the PITI payment abatement program, you can advertise your property like this: “Purchase this property and make no payments for up to 6 months!” Do you think that would attract more buyers to your home? Do you think that would give your home the edge over a home that is offering a free TV or home warranty? I think so. A buyer can live in a new home, payment free, for up to a half year. They can use the money they would be sending to the mortgage company toward the expense of decorating the new home instead of putting it on their credit cards. Or, they could make large payment to pay off their other debts. Or, they could invest the money for the kids college? Or... well, you get the point.

The PITI Payment Abatement Program is subject to the following rules:

  1. The seller must provide the payment abatement funds.
  2. Payment abatement funds are subject to seller concession limits
  3. Property must be a 1-2 unit Primary Residence or Second Home
  4. Maximum term is 30 Years.
  5. Buyers must qualify at the total amount of monthly payment

Example:

Suppose you sell your home for $250,000 and the borrower has a 10% down payment – their mortgage amount would be $250,000. Let’s assume the mortgage is a 30 year fixed rate mortgage with an interest rate of 6.5%; the taxes on the property are $5,000 per year; the homeowner’s insurance is $600 per year; and the mortgage insurance is $97.50 per month. The total PITI Payment for this property will be:

  • Principal and Interest $1,519.22
  • Taxes $416.66
  • Homeowners Insurance $50.00
  • Mortgage Insurance $97.50
  • Total Monthly Payment (PITI) $2,083.38

If you agree to pay for the buyers PITI payment for 6 months, the total would be $12,500.28, or just over 5% of the sales price of the home.

Most people, in a regular real estate market, sell their homes between 90 – 98% of the asking price. In a slow market, homes typically will sell for less than that. But, if market your home with creative financing such as the PITI Payment Abatement Program, you could walk away with more money, and a quicker sale.