When homes aren’t selling because potential buyers are struggling to qualify, a builder’s first instinct is to lower the price. But this might not be the best strategy.

There’s another option to explore, one that could benefit both the builder and the buyer. It’s called a forward commitment. Here’s how it works:

A forward commitment allows a home builder to buy a block of homes loans upfront and lock in an attractive interest rate, say 3 to 5 percent, which when compared to an average market rate of 7%, helps to sell homes faster.

More buyers qualify. More inventory moves. Everybody wins.

How does buying down interest rates save a builder money?

You’ve had a home on the market for $500,000, but no takers. Let’s say you drop the price by $75,000 to $425,000 to attract more buyers, but they’re still facing a current market rate of 7%. With a 10% down payment, the loan amount would be $382,500 and equates to a monthly mortgage payment of $2,640. (That includes principal and interest and private mortgage insurance, or P&I/PMI.)

Instead of taking a $75,000 price reduction (which impacts other homeowners in the community, comparable sales etc.), you could pay roughly $27,000 for an interest rate buydown, keep the home priced at $500,000 but offer a 5% interest rate. With a 10% down payment the loan amount would be $450,000 and equates to monthly payments in the amount of $2,528 P&I/PMI. Even at the higher home price, the lower interest rate saves the buyer $112 per month and the home builder $48,000 in this scenario.!

Unless buyers are paying cash, the home loan payment likely sells the home, not price of the home itself.

“It’s more effective to bring the rate down for affordability,” says Michael Newton, Division President of Cornerstone Home Lending, which funded $1 billion in builder forward commitments last year. The option has helped builder partners move inventory quicker.

Michael Welty is the President of Homebuilding for one of those builder partners, Hartford Homes in Northern Colorado. His company has bought 18 loan blocks from Cornerstone Home Lending since September of 2022.

“What it really does is open up the conversation for buyers who thought their monthly mortgage payments would be too expensive,” Welty says. “Forward commitments are a great tool to set Hartford apart from our competition and make payments more affordable for homeowners again.”

But what if interest rates drop?

What may give builders pause about engaging in this type of rate warfare is the prospect of interest rates suddenly dropping. What if, in the unlikely event, rates plummet from 7 to 4 percent overnight?

“It’s no different than hedging anything else,” says Ryan Smith, President of Homebuilding at Oakwood Homes which builds in Arizona, Utah, and Colorado. The company has purchased more than 70 forward commitments from Cornerstone Home Lending totaling $190 million.

“Time your purchases to your needs,” Smith advises.

To further safeguard builders from sudden market swings, Cornerstone Home Lending offers a float-down option, adjusting rates to the market average so builders aren’t left holding the bag.

Now smaller and midsized builders can play the same game as big builders.

“It’s really hard for private builders to compete if they’re not buying forward commitments,” Welty says.

With more than 100 builder relationships coast-to-coast, Cornerstone Home Lending is a premier choice among builders. Cornerstone is a dedicated building partner and advisor, committed to working closely with builders to secure forward commitments and provide strategic solutions aimed at boosting home sales. Click here to learn more about our services.