What is a Seller-Funded Buydown?
A Seller-Funded Buydown is a seller credit/concession given to the buyer to lower their payment temporarily. This program is generally used in a higher interest rate environment to make a house payment more affordable.
Payments are made more affordable for the first one, two, or three years of the mortgage because the seller offers a credit that pays the difference between the full P&I payment and the reduced P&I payment. The seller only needs to provide the credit, and the lender handles supplementing the payment. So, it’s a seller credit used differently!
How Does a Seller Buydown Work?
The lender takes the credit/concession and places it into an escrow account. During Servicing, the borrower pays the reduced amount during the buydown portion of their mortgage, and any deficit is taken from the account that is set up using the seller’s funds.
Let’s examine a practical example.
Sales Price: $315,000
Loan Details: $299,250 30-Year Term with a Fixed Rate at 7.00%
Seller Credit: $7,000
The borrower gets a 2-1 Buydown, which means the P&I is calculated at 2% less than the fixed rate for the first year and 1% less for the second year. In this example, the borrower’s P&I is calculated off of a rate of 5% for the first year and 6% for the second year, and 7% for years 3-30.
|Year of Loan||Note Rate||Buydown Rate||P&I||Monthly|
During the first year, the borrower would pay $1,606.44 each month, and the servicer would take the deficit of $384.48 from the seller credit escrow account they set up.
During the second year, the borrower would pay $1,794.15 each month, and the servicer would take the deficit of $196.77 from the seller credit escrow account they set up.
For years 3-30, the borrower would pay the full amount.
Three Important Notes
- The borrower’s loan is still being paid down just like a 30 -year fixed rate mortgage.
- The borrower is qualified for the total payment amount, not the lower payment.
- If the borrower refinances before using the entirety of the seller’s credit, the remainder is applied toward the loan’s unpaid principal balance.
- ARM Loans: Fannie Mae, Freddie Mac, and VA willow a temporary buydown on ARM products. FHA will not allow a buydown on an ARM, and USDA does not offer ARM programs.
- For Fannie Mae ARMS with a temporary buydown, the initial fixed rate of the ARM must be no less than 3 years.
- For Freddie Mac ARMs with temporary buydown, the initial fixed rate of the ARM must be no less than 7 years.
- FHA will only allow 2-1 or 1-1 buydowns; Fannie Mae & Freddie Mac will allow 3-2-1 buydowns, 2-1 buydowns, and 1-1 buydowns. For VA, it is lender determined.
- Buydowns cannot be used on investment properties.
Is a Permanent Buydown Better Than a Seller-Funded Temporary Buydown?
A permanent buydown is taking the seller’s credit and applying it to discount points to get a lower rate for the entire loan term. Depending on the amount of the seller credit and corresponding discount points, you may be able to significantly lower your rate. There are two key factors to consider.
- How long do you plan to stay in the home? Paying to permanently lower the rate of a 30-year loan is generally only cost-effective you plan on being in that home a most of those 30 years. The average American stays in one home for approximately 13 years, per the National Association of Realtors.
- Do you anticipate rates to remain steady, rise, or go down? If you anticipate rates to lower, taking a temporary buydown and refinancing when rates drop might be a better option.
Here is an example of a permanent buydown option with the same sales and loan amounts from above.
|Permanent Rate||Points||Cost to Seller||P&I |
|Monthly Reduction to|
Another factor to consider is how you plan to utilize your money. Some buyers like the prospect of a much lower payment for the first year or so. This can be useful for first-time homebuyers who are either low on funds or would like to put that money toward home improvements. This is also true for people who are newer to the workforce and anticipate their income to increase significantly over the next few years. Others might plan on staying in their home a long time and would prefer to reduce the overall amount of interest paid over the long haul. We’re here to help you evaluate your current situation, expectations, and goals to find the right option for you.