Plain-English definitions of the buydowns, rate locks, concessions and qualifying terms your sales team needs to sell on payment, not price.
Most buyers shop for a monthly payment, not a sticker price. This buyer financing glossary groups the terms behind that payment by where they come up in a sale, from choosing a buydown to measuring how fast inventory moves. Each definition explains why the term matters to your margin or your timeline. For the loans that fund the build itself, see the Forward Motion Lending investor loan glossary.
These are the tools a builder uses to change what a buyer pays each month without changing the price on the listing.
An upfront payment that lowers the interest rate on the buyer’s loan, either for the first few years or for the full term. On new construction the builder usually funds it as a concession, which lets the home keep its list price while the buyer’s monthly payment comes down. Our guide to builder mortgage rate buydowns walks through the math on both types.
A buydown that lowers the rate for an introductory period and then steps it back up to the note rate. In a 2-1 buydown the rate is 2 points lower in year one and 1 point lower in year two; a 3-2-1 adds a third year, and a 1-0 covers only the first year. The cost is the total of the payment savings over that period, deposited at closing.
A buydown that lowers the rate for the life of the loan, paid for with discount points at closing. It usually costs more upfront than a temporary buydown, but the lower payment never resets, which matters to buyers who plan to stay in the home.
The escrow account that holds the funds for a temporary buydown. Each month during the buydown period, the account covers the difference between the buyer’s reduced payment and the full payment due at the note rate. If the loan is paid off early, how any unused balance is handled depends on the loan documents.
Fees paid at closing to lower a loan’s interest rate. One point equals 1% of the loan amount, and how much each point lowers the rate depends on the lender and the market on that day. Builders often pay points on the buyer’s behalf as part of a permanent buydown.
The interest rate written into the buyer’s promissory note, before any temporary buydown. It is the rate the loan returns to once a temporary buydown ends, and for most conventional loans it is also the rate the buyer must qualify at.
A new home can take months to finish. These terms describe how a rate is held steady while the house gets built.
A lender’s commitment to hold a specific interest rate and points for a set period, commonly 30 to 60 days, while the loan is processed. If the loan does not close before the lock expires, the buyer may have to pay to extend it or accept the current market rate.
A rate lock longer than the standard window, sometimes up to a year, designed for homes still under construction. Extended locks usually cost more or carry a slightly higher rate, so they are often paired with a builder incentive to cover the difference.
An arrangement in which a builder buys access to a pool of below-market rates from a lender in advance, then offers those rates to qualified buyers of its homes. It lets a builder advertise a fixed payment across a community, but the builder pays the commitment fee whether or not every home sells using it.
A feature of some rate locks that lets the buyer take a lower rate if market rates fall before closing, usually for a fee or within set limits. It protects a buyer who locked early on a home that is still months from completion.
Every dollar a builder contributes toward a buyer’s costs counts against a limit. These terms explain where those limits come from.
Money the seller agrees to contribute toward the buyer’s closing costs, prepaid items or a rate buydown, instead of lowering the price. Concessions keep the recorded sales price intact, which helps protect the comparable sales that the next appraisal in the community will rely on.
Caps that loan programs place on how much a seller, builder or agent can contribute. Under the Fannie Mae Selling Guide, a primary residence with more than 10% down allows up to 6% (9% at 25% or more down, 3% with less than 10% down), and buydown funds count toward the cap. FHA and USDA loans generally allow up to 6% and VA caps concessions at 4%, so confirm the current figure with the buyer’s lender before you build an offer around it.
A contribution that goes beyond what the loan program allows, or that pays for things such as furniture or cash back to the buyer. Lenders deduct sales concessions from the sales price before calculating the loan, so an oversized incentive can reduce the loan amount the buyer qualifies for.
The fees and charges paid to complete the purchase, including lender fees, title insurance, appraisal, recording fees and prepaid taxes and insurance. They typically run a few percent of the price, and covering them is one of the most common builder incentives.
A buyer who loves the house still has to qualify for the payment. These are the numbers a lender looks at.
The buyer’s total monthly debt payments, including the new housing payment, divided by gross monthly income. Lenders often look at it two ways: the housing payment alone (the front-end ratio) and all debts combined (the back-end ratio). A lower payment improves DTI directly, which is why rate incentives can bring more buyers into range than an equal price cut.
The interest rate a lender uses to test whether the buyer can afford the loan. For conventional loans with a temporary buydown, the Fannie Mae Selling Guide requires the buyer to qualify at the note rate, not the reduced rate. A temporary buydown therefore eases the first years of payments but does not usually help a buyer qualify; a permanent buydown can.
Principal, interest, taxes and insurance: the four parts of a typical monthly mortgage payment. Mortgage insurance and HOA dues are often added on top. Buyers shop on this total, so a buyer financing conversation should start with PITI rather than list price.
A lender’s conditional commitment to lend up to a set amount, based on a review of the buyer’s credit, income and assets. A pre-approved buyer is a firmer prospect than one who is only pre-qualified, because the lender has verified the numbers.
Insurance that protects the lender on a conventional loan when the buyer puts down less than 20%. The buyer pays it, usually as part of the monthly payment. Under federal rules summarized by the CFPB, the buyer can ask to cancel PMI once the balance is scheduled to reach 80% of the original value, and it ends automatically at 78%.
The mortgage insurance on an FHA loan. It includes an upfront premium of 1.75% of the loan amount, usually financed into the loan, plus an annual premium paid monthly. With less than 10% down the annual premium lasts for the life of the loan; with 10% or more down it lasts 11 years.
The yearly cost of a loan including interest and certain fees, expressed as a rate. APR is usually higher than the note rate and makes it easier to compare offers from different lenders. When a builder pays points, the buyer’s APR falls along with the rate.
The buyer’s loan program decides how much a builder can contribute and how the deal must be structured.
A mortgage not insured by a government agency, usually sold to Fannie Mae or Freddie Mac. Down payments can start around 3% for eligible buyers, PMI applies below 20% down, and contribution limits follow the agency guide.
A mortgage insured by the Federal Housing Administration, popular with first-time buyers because it allows a down payment as low as 3.5% and more flexible credit. Buyers pay MIP, and seller contributions are generally capped at 6%.
A mortgage guaranteed by the U.S. Department of Veterans Affairs for eligible veterans, service members and some surviving spouses. It allows no down payment and has no monthly mortgage insurance, though most borrowers pay a one-time funding fee. Seller concessions are capped at 4%, with normal closing costs and discount points counted separately.
A mortgage backed by the U.S. Department of Agriculture for eligible buyers in qualifying rural and suburban areas, with no down payment required and income limits that vary by county. Buyers pay an upfront and annual guarantee fee instead of PMI. It can matter for builders working on the edge of a metro.
A loan with a fixed rate for an initial period, such as 5, 7 or 10 years, after which the rate adjusts at set intervals based on an index plus a margin, within caps. ARMs can lower the starting payment, but the buyer takes on the risk that the payment rises later.
The price a builder accepts today becomes the comparable that the next buyer’s appraisal leans on. These terms explain why.
An independent appraiser’s opinion of what the home is worth, which the lender uses to size the buyer’s loan. Lenders lend against the lower of the price or the appraised value, so a low appraisal can shrink the loan or force the deal to be renegotiated.
The difference between the contract price and a lower appraised value. The buyer must cover the gap in cash, the seller must lower the price, or the two must meet in between. Gaps are more likely in communities where recent sales were discounted.
Recently sold homes similar in location, size, age and features that an appraiser uses to estimate value. In a new community, the builder’s own closed sales often become the comps, which is why every recorded price cut can follow the builder into future appraisals.
Lowering a home’s list or contract price to attract a buyer. A cut reduces the builder’s margin dollar for dollar, resets buyers’ expectations for the rest of the community and lowers future comps. Our article on why price cuts quietly kill builder margin compares a cut with a payment-based incentive. To run the numbers side by side, see monthly payment vs. price reduction.
How fast finished homes sell decides how fast a builder’s capital comes back. These terms measure that pace.
The pace at which homes sell in a given market or community, usually expressed as homes sold per month. A faster absorption rate shortens carrying time and returns capital sooner, and it is the central measure in the BuildersYield system.
How long the current inventory of homes for sale would last at the current sales pace, calculated as homes for sale divided by homes sold per month. Around six months is commonly read as a balanced market, with fewer pointing to a seller’s market and more to a buyer’s market. The U.S. Census Bureau publishes a monthly figure for new homes in its New Residential Sales report.
The number of days a home has been listed before it goes under contract. A rising DOM in a community is often the earliest sign that pricing or incentives need attention, and every extra day adds interest, taxes and insurance to a spec home’s carrying cost.
A home a builder starts without a buyer under contract, on the expectation that it will sell once complete. Spec homes carry construction-loan interest until they close, so the sales pace drives their profit. Construction-loan terms such as loan-to-cost and draws are defined in the Forward Motion Lending investor loan glossary.
Returning the cash from a sold home into the next project as quickly as possible. The faster a builder recycles capital, the more homes the same equity can produce in a year. Our case study on preserving $42K in margin shows how a payment strategy kept one sale on track without a price cut.
It is a reference to the mortgage terms a builder’s sales team runs into when selling a home on payment rather than price, from buydowns and rate locks to concession limits, DTI and absorption. This buyer financing glossary explains each term from the builder’s side of the table.
Often, but not always. A buydown can lower the buyer’s monthly payment more than an equal-cost price cut while keeping the recorded sales price intact for future appraisals. The right choice depends on the buyer’s loan program, how long they plan to stay and how close they are to qualifying.
On new construction the builder or seller usually pays, either by depositing the cost of a temporary buydown into a subsidy account or by paying discount points for a permanent one. The payment is treated as a seller concession and counts toward the loan program’s contribution limit.
It depends on the loan program and the down payment. Conventional loans allow 3% to 9% for a primary residence, FHA and USDA loans generally allow up to 6% and VA caps concessions at 4%. Limits change, so confirm them with the buyer’s lender.
Usually not. For conventional loans, the buyer must qualify at the note rate, so a temporary buydown lowers the early payments but not the qualifying payment. A permanent buydown lowers the note rate itself, which can help a buyer qualify.
A rate lock holds a rate for one buyer on one loan. A forward commitment is bought by the builder in advance and makes a set rate available to qualified buyers across several homes or a whole community.
Around six months of supply is commonly read as balanced. More than that suggests buyers have the upper hand and homes will take longer to sell, which is when payment-based incentives tend to matter most.
No. BuildersYield is designed to work alongside a builder’s current lenders and financing partners, not replace them. It builds the payment advantage into a broader inventory strategy focused on sales velocity, margin and capital recycling.
