When buying a house with an FHA loan, sometimes people want to participate in a buydown program. The most popular buydown program is called a 2/1 buydown program.
General Requirements for Mortgage Loans with Temporary Interest Rate Buydown Plans
- Borrower must qualify at the Note rate and not at the “bought down” rate. A temporary buydown may only be considered as a compensating factor.
- The buydown must adjust in no earlier than 12 month increments and be no greater than 1% per 12 months.
- Maximum 2-1 Buydown is permitted.
- Costs for temporary buydowns, unless paid by the borrower, must be included in the 6% seller contribution limitation.
- Escrow Buydown Agreement must be signed at closing by the borrower and provider of the buydown funds.
- The buydown funds are placed in an escrow account to contribute towards the borrower’s mortgage payment during the term of the buydown.
- Any unused buydown funds remaining in the escrow account should the loan be prepaid must be applied to the principal balance of the loan.
Generally speaking, temporary buydowns are not allowed for any refinance transaction or any ARM transaction.
Here is a simple example of a 2/1 buydown:
The difference in the amount of payments between the Note rate and the effective payment rate is funded from a buydown account that is established when the
loan closes. The following table illustrates the monthly and annual buydown amount that is funded from the buy down account.