2-1 buydown
Year one: 2 points below the note rate. Year two: 1 point below. Year three on: the full note rate. The most common one, and the one builders like to advertise.
Temporary buydowns and the 2-1 buydown, in plain English.
A temporary buydown lowers your mortgage payment for the first year or few, then steps up to the full payment. Builders love offering them. Here's how they actually work, who pays, what each loan program allows, and when a buydown is a good deal or just a shiny one.
What a temporary buydown is
Your loan has a note rate. That's the real rate, and it's the one in your loan documents. A temporary buydown doesn't change it. Instead, someone puts money into an account at closing, and each month part of that money goes toward your payment. You pay less early on. Once the money runs out on schedule, you pay the full amount for the rest of the loan.
So it's a subsidy, not a new rate. The loan papers show the full payment, and you're on the hook for it if the buydown money isn't there for any reason.
2-1 buydown, 1-0, and 3-2-1
The numbers in the name tell you how many percentage points below the note rate your payment is figured each year.
1-0 buydown
Year one: 1 point below the note rate. Year two on: the full note rate. Smaller, cheaper, and a gentler step.
3-2-1 buydown
Three years of help: 3 points below, then 2, then 1, then the full note rate. Allowed on conventional and VA loans. Not on USDA, which caps the reduction at 2 points. Not every lender offers it.
The rule they all share
The payment can only step up by about one percentage point a year. That's built into Fannie Mae, Freddie Mac, VA, and USDA rules, so nobody gets a 3-point jump in year two.
Who pays for it
- The seller or builder The usual case. It's a concession, so it counts toward the loan program's limit on what an interested party can contribute (more on that below).
- The lender Sometimes, depending on the program. There are rules here. For example, VA doesn't let a lender fund a buydown by charging an above-market rate, and Freddie Mac won't take a no-cash-out refinance with a buydown paid for that way.
- You Allowed on some programs, including FHA and VA. Not allowed on USDA. Paying for your own buydown is just prepaying part of your payments, so it only makes sense in specific situations.
Where the buydown money sits
The money is deposited at closing into a separate account: a custodial account for Fannie Mae and Freddie Mac loans, a segregated escrow for VA, and an escrow with a supervised financial institution for USDA. It has to be fully funded up front. Each month, the scheduled amount is drawn out and applied to your payment. It can't be used to catch up a late payment, and you can't withdraw it.
You qualify at the full note rate
This is the part people miss. Fannie Mae, Freddie Mac, FHA, VA, and USDA all require you to qualify on the full payment, not the bought-down one. A buydown doesn't make a bigger house fit your income. It makes the first year or two cheaper. VA does let an underwriter count the buydown as a compensating factor when the numbers are close, but you still have to afford the full payment.
If you sell or refinance early
Any buydown money that hasn't been used yet doesn't just vanish, but where it goes depends on the program and the buydown agreement:
- Fannie Mae If the loan is paid off, the remaining funds are credited toward the payoff, or returned to you or the lender as the agreement says. If the buyer assumes the loan, the buydown can keep going.
- VA If the loan is paid off, the remaining funds are credited against what you owe. They can't go back to whoever put them in. On an assumption, the payments keep going for the new borrower.
- Freddie Mac, FHA, and USDA Depends on the loan program and the agreement. Ask me before you sign so you know.
Temporary buydown vs permanent buydown
Temporary buydown
Lowers the payment for one to three years. The note rate stays the same. Good when you want breathing room early, like the year you're also buying a fridge, blinds, and a lawn mower.
Permanent buydown (discount points)
You or the seller pay points at closing to lower the note rate itself, for the life of the loan. Costs more up front, keeps paying off as long as you keep the loan.
Which wins depends on how long you'll keep the loan. If you might refinance or sell in a few years, the long-term savings from points may never fully show up. If you plan to stay put, points can come out ahead. I'll run both for your situation.
Buydown vs price cut
A price cut
Lowers the loan amount, and the savings last as long as the loan does. It can also lower the cash you need if your down payment is a percentage of the price. Better if you plan to stay a long time.
A temporary buydown
Bigger payment relief early, nothing later. Better if the first couple of years are the tight ones, like when your income is set to rise or you're carrying a second house for a bit.
A seller or builder may offer either one for roughly the same cost to them. Get both offers in writing and I'll show you what each does to your payment and your cash to close.
Temporary buydown rules by loan type
The short version of what each program allows. Lenders can add their own rules on top, so the final word depends on the loan program. Ask me.
Conventional: Fannie Mae
Per the Selling Guide: fixed-rate loans and certain ARMs. Primary homes and second homes only. No investment properties, no cash-out refinances. Up to 3 years, up to 3 points below the note rate, with the payment rising no more than 1 point a year. Seller or builder money counts toward Fannie Mae's interested-party limit, which runs from 3% to 9% of the price or value depending on your down payment.
Conventional: Freddie Mac
Freddie Mac's rules are similar: up to 3 points below the note rate, up to 3 years, rising no more than 1 point a year. Primary homes and second homes. No investment properties, no cash-out refinances. Interested-party limits apply when the seller or builder pays.
FHA
Fixed-rate loans on 1- to 4-unit homes. No ARMs. Seller, builder, lender, or buyer can fund it. Seller and builder money counts toward FHA's 6% interested-party limit, along with closing costs and points they pay.
VA
Fixed-rate loans only. One to three years, rising no more than about 1 point a year. A buydown paid by the seller or builder is a seller concession, and VA caps concessions at 4% of the home's reasonable value. Normal closing costs the seller pays don't count toward that 4%.
USDA
Allowed, with tighter limits. No more than 2 points below the note rate, rising no more than 1 point a year, so no 3-2-1. Funds can come from the seller, lender, or another third party, but not from you. Seller contributions are capped at 6% of the price.
Yes, even on jumbo loans
A lot of lenders don't offer temporary buydowns on jumbo loans at all. I do. I have jumbo buydowns available on select loans. If you're buying above the conforming limit and the seller is offering a buydown, ask me before you assume it's off the table.
When a buydown is a good fit, and when it isn't
Good fit
- The seller or builder is paying for it, and it fits under the concession limit.
- You can comfortably afford the full payment, and you'd like the first year or two easier.
- You have big costs coming early: furniture, repairs, a move, a new baby.
Not a fit
- You can only afford the bought-down payment. Year three will arrive on time.
- You're counting on refinancing to fix the payment later. Nobody can promise that.
- The builder is pricing the buydown into a higher sale price or a worse rate elsewhere. Compare.
Questions to ask the builder
Buying new around Fort Worth, in Aledo, or out in Parker County? Ask these before you sign.
- Do I have to use your lender to get the buydown? If yes, get the incentive in writing and bring it to me. You're allowed to compare.
- How much is the buydown worth in dollars? Not "a 2-1." The actual amount.
- Could I take that money as a price cut or toward closing costs instead? Sometimes the other option is better.
- What's the note rate after the buydown ends? That's the payment you're really qualifying for.
- When is the house expected to be done? Long builds can mean the approval needs updating.
- Is there a PID or MUD assessment? That goes in the payment too, and it doesn't get bought down.
How to start
Send the short form, call, or email. Tell me what the seller or builder is offering, the price, and the loan type you're thinking about. I'll show you what the buydown actually does to your payment, and what the alternatives look like.
Phone: 817-873-6288
Email: [email protected]
Temporary buydown questions
What is a 2-1 buydown?
A temporary buydown where your payment is figured at 2 percentage points below the note rate in year one, 1 point below in year two, and the full note rate from year three on. Someone pays for the difference up front, and that money sits in an account that covers part of each payment.
Do I qualify at the lower rate?
No. Fannie Mae, Freddie Mac, FHA, VA, and USDA all have you qualify at the full note rate, not the bought-down rate. If you can't afford the year-three payment, the buydown doesn't fix that.
Who pays for a temporary buydown?
Usually the seller or builder, as a concession. Depending on the loan program, the lender or the buyer can pay for it too. Seller and builder money counts toward the program's concession limit.
What happens to the leftover money if I sell or refinance early?
It depends on the loan program and the buydown agreement. Fannie Mae lets it be credited toward the payoff or returned as the agreement says. VA requires it to be credited against what you owe. For other programs, ask me before you sign.
Can I do a temporary buydown on an investment property or a cash-out refinance?
Not on conventional loans. Fannie Mae and Freddie Mac don't allow temporary buydowns on investment properties or cash-out refinances. FHA, VA, and USDA buydowns are for fixed-rate loans on homes you live in.
Can I get a temporary buydown on a jumbo loan?
Yes, on select loans. A lot of lenders don't offer temporary buydowns on jumbo loans. I have jumbo buydowns available on select loans. Ask me, tell me the deal, and I'll tell you if yours is one of them.
Is a buydown better than a price cut?
Depends on your plans. A price cut helps for the life of the loan. A buydown helps more in the first year or two. Tell me the numbers and I'll show you both side by side.
Subject to qualification and program guidelines. Not all applicants will qualify. Not a commitment to lend.