Conventional loans · Fannie Mae B2-1.4-04Seller-paid 2-1 buydowns: Fannie Mae's rules for temporary rate buydowns

A temporary interest rate buydown lowers the buyer's payment for the first years of the loan using money deposited up front – often by the seller as a concession. On a Fannie Mae loan it is allowed on fixed-rate mortgages and certain ARMs for principal residences and second homes, not for investment properties or cash-out refinances. The reduction can be no more than 3 percentage points, the rate the borrower pays can rise no more than 1% a year, and the buydown period can last no more than 3 years – so a 2-1 or a 3-2-1 fits. The borrower is qualified at the full note rate, not the bought-down rate. When the seller, builder, agent or another interested party pays for it, the cost counts toward Fannie Mae's interested party contribution limits. The plan must be a written agreement between the party paying and the borrower; the note and mortgage show the permanent terms, and the borrower still owes the full payment if the buydown funds are unavailable. The funds sit in a custodial account fully funded before the loan is sold. If the loan is paid off early, leftover funds are credited to the payoff or returned to the borrower (or the lender, if it funded the buydown) as the agreement says.