Ease into homeownership with a temporary interest rate reduction funded by the seller or builder.
How Does a Temporary Buydown Work?
A buydown isn’t a permanent rate change. Instead, the “subsidy” amount is held in a custodial escrow account. Each month during the buydown period, a portion of that money is released to the lender to cover the difference between your “bought-down” rate and your actual note rate.
Popular Buydown Structures:
- 2-1 Buydown: Your rate is 2% lower the first year and 1% lower the second year. By year three, you pay the full note rate.
- 3-2-1 Buydown: A three-year step-up (3% lower in year one, 2% in year two, 1% in year three).
- 1-0 Buydown: A simple 1% reduction for the first year only—perfect for those who want immediate relief with a smaller upfront cost.
Eligibility & Qualifying
While the initial payments are lower, lenders must ensure you can afford the home long-term. Under current guidelines:
- Qualification: You must qualify at the full “note rate,” not the discounted initial rate. We recommend checking our DTI ratio guidelines to see how this impacts your buying power.
- Occupancy: Available for primary residences and second homes. (Investment properties are generally ineligible).
- Credit Requirements: Standard credit score tiers apply, typically requiring a 620 minimum FICO.
The Role of Seller Concessions
The most common way to fund a buydown is through Interested Party Contributions (IPCs). Rather than asking a seller to drop their price, you can ask them to pay for a 2-1 buydown as an incentive. It’s important to stay within the seller concessions limits, which vary based on your down payment amount.
Is a Buydown Right for You?
A buydown is a fantastic option if you are buying in competitive areas like Kansas City or Overland Park and want to preserve your cash flow for renovations or furniture during the first few years.
The “Refinance” Bonus: If you decide to refinance into a lower permanent rate before the buydown period ends, any “unused” money left in the buydown escrow account is typically applied toward your principal balance!
Expert Comparison: Temporary vs. Permanent
Not sure if you should choose a temporary buydown or use those funds to buy permanent discount points? Check out our guide on choosing the right conventional loan to see which strategy saves you more over the life of the loan.