Temporary buydowns are when up-front funds are deposited into an escrow account to temporarily reduce the interest rate, and effective monthly mortgage payment for a specific period of time. Temporary buydowns are often used as a marketing tool for lenders, sellers, and builders.
Frequently Asked Questions
- What are the benefits of a temporary buydown?
A temporary buydown provides the Veteran with a lower payment at the beginning of their loan. The Veteran will have a reduced monthly payment for the period that the buydown is active. Temporary buydowns may assist Veterans in managing their finances in the early years of the loan.
- How do temporary buydowns work?
Up-front funds are deposited into an escrow or buydown account. The funds in the account are applied to the loan payment on a monthly basis to reduce the borrower’s monthly mortgage payment. Changes to the monthly buydown amount must come in annual reductions of approximately equal amounts, and must not result in a payment increase of greater than one percentage point.
- How long can the buydown arrangement last?
Temporary buydowns must run for a minimum of one year and are permitted for a maximum of three years.
- What types of loans can include a temporary buydown?
Temporary buydowns may be used with all fixed-rate VA loan types, including purchase, cash-out refinances, and Interest Rate Reduction Refinancing Loans (IRRRLs). (Source: 38 U.S. Code § 3720(a))
- Who can fund a buydown?
The buydown can be funded by the seller, lender, builder or Veteran.
- Who can hold the escrowed funds?
Funds must be held in a separate escrow account beyond the reach of prospective creditors of the lender, seller, builder, or the Veteran. The funds may not be used for anything other than the stated purpose and may not revert to the party that established the escrow.
- What happens to the funds if the property is sold or foreclosed?
If the loan is paid in full, foreclosed, or if a short sale or deed in lieu is conducted then the remaining funds must be applied to the outstanding indebtedness (balance owned). The Veteran may not receive the funds directly. In cases where the loan is assumed by another party, the funds must stay with the loan and continue to pay out on behalf of the assumer as established by the buydown agreement.
- What are the underwriting considerations?
Generally, lenders will qualify Veterans with the full payment. This is to ensure the Veteran can afford the loan payment when the temporary buydown ends. To strengthen or support a loan application, an underwriter may consider the temporary buydown as a compensating factor when underwriting the loan.
- What documentation is needed?
A lender must provide the Veteran with a clear written explanation of the buydown agreement. The agreement should indicate at a minimum: the property address, length of buydown, amount of buydown, the rate the payment is bought down to, the original rate, and who will hold the funds. It must be signed by the Veteran and any co-borrowers.