2/1 Buydown FHA Loan

Often times lenders will allow borrowers to temporarily "buy down" the interest rate on a mortgage. The FHA 2-1 buy down allows a purchaser to reduce the initial interest rate on their mortgage by 2% the first year, 1% the next year, and 0% every year thereafter. It is important to note that there is generally a fee in the form of discount points to buy down a mortgage.

This 2-1 buy down should not be confused with a permanent buy down. A permanent buy down is when the borrower pays points to lower the interest rate on the mortgage over the life of the loan. Therefore, if you permanently buy down the note rate from 7% to 6.5% on a 30 year mortgage, your note rate will always be 6.5% for the next 30 years.

With a 2-1 buy down, if you were to "temporarily" lower the rate on a 7% 30 year mortgage, the interest rate the first year would be 5%, the next year would be 6%, and it would return back to 7% the third year and every year thereafter.

Most mortgage professionals generally do not recommend a 2-1 buy down for a mortgage if the borrower is paying for the buy down. This is because the costs that are charged the borrower at closing generally equal the savings in the lower payment. Furthermore, if the seller is paying for the buy down and the buyer will occupy the property for more than 3 years, most mortgage professionals will recommend a permanent buy down so that the borrower can enjoy the savings over a longer period of time.

Temporary Interest Rate Buydowns are permitted only on purchase transactions. Buydowns may only be used on fixed-rate mortgages.

Buydown funds may come from the seller, lender, borrower or other party. Funds from the seller or any other interested third party are considered seller contributions and must be included in the six percent limit on seller contributions.

Lender-funded buydowns on fixed-rate purchase money mortgages through premium pricing are acceptable provided that the funds generated do not result in a reduction of more than 2 percentage points below the note rate.

The lender must establish that the eventual increase in mortgage payments will not affect the borrower adversely and likely lead to default. The underwriter must document that the borrower meets one of the following criteria:

  1. The borrower has a potential for increased income that would offset the scheduled payment increases, as indicated by job training or education in the borrower's profession or by a history of advancement in the borrower's career with attendant increases in earnings.

  2. The borrower has a demonstrated ability to manage financial obligations in such a way that a greater portion of income may be devoted to housing expenses. This criterion also may include borrowers whose long-term debt, if any, will not extend beyond the term of the buydown agreement.

  3. The borrower has substantial assets available to cushion the effect of the increased payments.

  4. The cash investment made by the borrower substantially exceeds the minimum required



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