As home prices continue to rise, buyers - especially those purchasing their first home - are finding it increasingly difficult to qualify for a home loan. As a result, lenders are developing a variety of aggressive new loan options designed to make it easier for buyers to qualify. One such program is the permanent buy down loan.

Buy down loans have always been available, but due to restrictions and the high cost, the old programs were rarely used. The way a buy down loan works is a borrower pays interest upfront (in the form of discount points) to buy down the interest rate over the life of the loan. Since coming up with a down payment and closing costs is difficult for many buyers, most simply don't have the extra cash to buy down the interest rate.

Over the past few years, the most common type of buy down loan program has been the 2-1 buy down. With the 2-1 buy down, most lenders will pay for the buy down and offer a higher interest rate to the borrower over the life of the loan in exchange for buying down the rate for the first two. For example, if interest rates were at 8% for a 30 year fixed rate loan, a 2-1 buy down would offer a first year rate of 6%, and a second year rate of 7%. The rate for the third through remaining 27 years of the loan would be 8.5%. The big advantage for buyers on a buy down loan is the ability to qualify at the start rate, as opposed to the higher market rate. The 2-1 buy down program assumes that over the first two years of the loan the borrower's income will rise to handle the payment increases.

For borrowers who are retired, on a fixed income, or just don't want payment increases over the next couple of years, lenders are now offering a permanent buy down option. Borrowers seeking this type of loan can pay for the buy down with cash or negotiate with the seller to contribute for the buy down.

With today's programs, borrowers also have the option of financing the additional cost into the new loan, which increases the loan amount by 5%. On 30-year fixed rate buy down mortgages, current rates are as low as 6% for the life of the loan.

If buyers know they will be in the home short term (7-10 years) or plan on refinancing, there is yet another option. It's a buy down loan that offers a fixed rate for five years, converting to an adjustable rate mortgage after the initial buy down period. Rates for this type of program are currently as low as 4.75% fixed for five years. This is by far the most aggressive pricing for qualifying new buyers. Buyers get to qualify at 4.75% instead of current rates, which tremendously increases the price of home they can afford, and keeps their payment realistic.

To qualify for this type of loan, the lender requires a borrower come in with a minimum 5% down payment. If needed, the seller can contribute 3% towards closing costs. The buyer must also have a credit score of 680 or greater. Finally, the lender will require the borrower to have two months P.I.T.I. (principal, interest, taxes and insurance) in their bank account at the close of escrow. For a $2,000 monthly mortgage payment a buyer must have $4,000 in cash reserves at the close of escrow. The maximum loan amount for this program is $420,000. All other standard underwriting guidelines apply.

If you are having difficulty qualifying for a new home, this program may be a great option. Buying down the interest rate can keep your mortgage payment in a realistic price range and help you qualify for more home. These loans are also available for purchasing investment properties and second homes. For more information on buy down financing, contact your mortgage lender.