Temporary Buydowns
Temporary buydowns involve setting aside funds in an escrow account to temporarily reduce monthly mortgage payments. Each month, a portion of this escrow account is applied to lower the borrower's payment, making the loan more affordable during the buydown period.
The reduction in payments typically decreases at a consistent rate each year, with the payment increase capped at no more than one percent annually. This structured approach ensures gradual adjustments, providing a smoother transition to the full mortgage payment.
Frequently Asked Questions
What are the benefits of a temporary buydown for Veterans?
Veterans benefit from the reduced mortgage payment during the buydown period. This helps Veterans manage their finances and other homeownership costs during the crucial early years of homeownership.
How long does a temporary buydown last?
A temporary buydown can last anywhere from one to three years. Common frameworks for temporary buydowns are “3-2-1” (buydown lasts three years) and “2-1” (buydown lasts two years). An example of a 2-1 buydown and its effect on the mortgage payment is shown in the chart below.
Example of an Equal Interest Rate Increase
| Year | Effective Interest Rate | Veteran Payment | Monthly Buydown Contribution | Total Payment |
|---|---|---|---|---|
| 1 | 3% | $1,265 | $345 | $1,610 |
| 2 | 4% | $1,432 | $178 | $1,610 |
| 3-30 | 5% | $1,610 | $0 | $1,610 |
As the chart shows, the buydown funds are depleted at the end of the second year, and the borrower would begin making mortgage payments at the note rate.
What types of loans can include a temporary buydown?
Temporary buydowns can be applied to all fixed-rate VA home loans, including purchase loans, cash-out refinances, and interest rate reduction refinancing loans (IRRRLs), if they meet VA home loan requirements.
Who can fund a temporary buydown?
The temporary buydown can be funded by the seller, lender, builder, or Veteran.
Are temporary buydowns considered seller concessions?
Yes, temporary buydowns provided by the builder or seller are considered a seller concession. Seller concessions, or seller contributions, are capped at 4% of the reasonable value.
Where are the funds for temporary buydowns deposited?
The funds must be kept in a separate escrow account, protected from creditors of the lender, seller, builder or Veteran/buyers eligible to use a VA home loan. They cannot be used for any other purpose or returned to the party that funded the account.
What happens to the temporary buydown funds if the property is sold or foreclosed?
Any remaining funds in the temporary buydown account must be applied to the outstanding indebtedness if the loan is paid off in full, the property is foreclosed, or if a short sale or deed in lieu occurs.
If another party assumes the loan, the remaining funds may only be applied to the loan payments outlined in the buydown agreement.
How do temporary buydowns affect a Veteran’s ability to qualify for a home loan and what are the underwriting considerations?
Lenders are required to base their qualification decision on the full monthly payment amount that the borrower will owe after the temporary buydown period ends. This ensures that the Veteran/buyers eligible for a VA home loan can afford the loan long-term. Underwriters may consider the temporary buydown as a compensating factor.
What information should be included in temporary buydowns?
Lenders must provide a clear written explanation of the buydown agreement. The agreement should include:
- Property address
- Length of the buydown
- Amount of the buydown
- Payment rate(s) with the buydown
- Original interest rate
- The party responsible for holding the funds
For more information on temporary buydowns, please visit the VA Lenders Handbook and refer to Chapter 7, Section 7.
