Seller-Paid Rate Buydowns: Temporary 2-1 and 1-0 vs a Permanent Buydown

The house has been on the market a few weeks, and your agent thinks there's room to ask the seller for a credit. One smart use of that money is a lower payment. The real question is whether to lower it for a year or two, or for as long as you keep the loan.

That's the choice I walk clients through. Here is how each option works, how much a seller can pay, and what it does and doesn't do for your approval. For the loan itself, my Florida conventional loan page has the basics.

How does a seller-paid temporary buydown work?

The seller pays a lump sum at closing, and it goes into a separate escrow account. Each month, part of that money covers the gap between your reduced payment and the full payment. Your note rate never changes.

A 2-1 buydown is the common one. Your payment is figured at 2 points lower in year one and 1 point lower in year two, then the full note rate from year three on. A 1-0 buydown is shorter, with a payment 1 point lower in year one only.

Fannie Mae caps temporary buydowns at three years, and the payment rate can rise no more than 1 point each year. Freddie Mac also limits a buydown to three years and three points below the note rate.

What is a permanent buydown?

A permanent buydown uses discount points. One point equals 1% of the loan amount, paid at closing, and it lowers your interest rate for the life of the loan. The CFPB notes that points can be a good choice if you plan to keep your loan for a long time.

A seller can pay for points as part of a concession, within the same caps described below. Points show on page 2 of your Loan Estimate, in Section A, so you can see exactly what the credit is buying.

Do you qualify at the lower payment?

No. On a temporary buydown, you qualify at the full note rate, not the bought-down one. Fannie Mae, Freddie Mac, FHA, and VA all say so in their guidelines.

That rule protects you. The lender checks that the full payment fits your budget from day one, so year three holds no surprise. VA allows an underwriter to treat the buydown as a compensating factor, but the qualifying payment stays at the note rate.

A permanent buydown is different. The lower rate is the real note rate, so the lender qualifies you on that lower payment.

How much can a seller pay toward a buydown?

Each loan program caps seller help, often called interested party contributions or seller concessions. On conventional and FHA loans, the cost of a seller-paid buydown counts toward that cap, temporary or permanent. VA has its own rule, below.

Conventional loans (Fannie Mae and Freddie Mac). For a home you'll live in or a second home, the cap is based on your down payment. With less than 10% down, the seller can pay up to 3% of the price or appraised value, whichever is lower. With at least 10% but less than 25% down, the cap is 6%, and with 25% or more down it's 9%. For an investment property, it's 2%, and temporary buydowns aren't allowed on investment properties at all.

FHA loans. Interested parties can contribute up to 6% of the sales price toward closing costs, prepaid items, and discount points. HUD Handbook 4000.1 counts temporary and permanent buydowns inside that 6%.

VA loans. Seller concessions are capped at 4% of the home's reasonable value, and VA counts seller-funded temporary buydowns toward it. Normal closing costs and market-appropriate discount points paid by the seller don't count toward the 4%.

Go over the cap, and the extra is treated as a sales concession or an inducement to purchase. On a conventional loan, that excess comes off the price used for your loan to value, which can change your down payment math. My conventional loan page covers the rest of those rules.

Is a temporary or permanent buydown better?

It depends on how long you expect to keep the loan. A temporary buydown helps most in the first year or two, when moving costs and furniture land at once. A permanent buydown pays off over a longer stay.

There's also the refinance question. If you pay off the loan before the buydown funds run out, Fannie Mae says the remaining money goes toward your payoff or back as the buydown agreement specifies. VA says leftover funds are applied to the loan balance.

I'll tell you straight. Put both versions of the same seller credit side by side before you choose, and look at the payment in year three as well as year one.

What should you ask for in the offer?

Ask your agent to name the credit and its purpose in the contract. Then confirm these items before you sign:

• The concession cap for your loan type and down payment
• Whether the credit is for a 2-1, a 1-0, or discount points
• A written buydown agreement, which Fannie Mae and VA require
• An updated Loan Estimate showing the points or credit

Agents can print a seller-paid buydown sheet for a listing from my page for agents. Residential home loans in Maine and Florida. DSCR loans in 37 states.

FAQ

Do you qualify at the bought-down rate on a 2-1 buydown?

No, on a 2-1 buydown you qualify at the full note rate, not the reduced first-year rate. Fannie Mae's Selling Guide says the lender must qualify the borrower based on the note rate without consideration of the bought-down rate.

How much can a seller pay toward a buydown on a conventional loan?

On a Fannie Mae or Freddie Mac conventional loan for a home you'll live in, a seller can pay 3%, 6%, or 9% of the price or appraised value, depending on your down payment. With less than 10% down the cap is 3%, and a seller-paid buydown counts toward it.

Can the seller pay for a buydown on an FHA loan?

Yes, a seller can pay for a buydown on an FHA loan, as long as total contributions from interested parties stay within 6% of the sales price. HUD Handbook 4000.1 counts both temporary and permanent buydowns inside that 6% limit.

Can a seller pay for a buydown on a VA loan?

Yes, a seller can fund a temporary buydown on a VA loan, and VA treats it as a seller concession. VA caps seller concessions at 4% of the home's reasonable value.

What is the difference between a 2-1 buydown and a 1-0 buydown?

A 2-1 buydown lowers the payment rate by 2 points in year one and 1 point in year two, while a 1-0 buydown lowers it by 1 point for year one only. After either one ends, you pay the full note rate, and Fannie Mae limits each yearly step up to 1 point.

Is a permanent buydown better than a temporary buydown?

A permanent buydown is often a better fit if you expect to keep the loan for many years, while a temporary buydown mainly helps the first year or two. The CFPB notes that paying points can be a good choice if you plan to keep your loan for a long time.

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Is a seller credit on the table, or did a lender say a buydown won't fit your loan? Send me the offer terms and the lender's note through my contact page, or email travis@travis.mortgage. I'll lay a temporary and a permanent buydown side by side against your program's cap, so you know what to ask the seller for before you sign.

Started in 2004 and I'm still here.