Freddie Mac Guidelines: Financed Permanent Buydown Mortgages

What Is a Financed Permanent Buydown

A financed permanent buydown lets you roll discount points into your loan amount to permanently lower your interest rate. Instead of paying cash upfront for points, you finance them as part of your mortgage.

Say you're getting a $400,000 loan at 7% interest. You want to buy down the rate to 6.5% with two discount points, which costs $8,000. With a financed permanent buydown, you'd get a $408,000 loan at the 6.5% rate. You pay no cash upfront, but your loan balance is higher.

This differs from a temporary buydown where someone else (like the seller or builder) pays to reduce your rate for just the first few years. With a financed permanent buydown, the lower rate lasts for your entire loan term.

Which Loans Qualify for Financed Permanent Buydowns

Your loan must be either a fixed-rate mortgage or an adjustable-rate mortgage with specific terms. For ARMs, only 5/6-month, 7/6-month, or 10/6-month products work. These have initial fixed periods of 5, 7, or 10 years, then adjust every six months.

Several loan programs cannot use financed permanent buydowns. These include all government loans (FHA, VA, USDA), Fannie Mae's affordable housing programs (HomeReady, HomeOne, HeritageOne), and Community Land Trust mortgages.

You also cannot combine a financed permanent buydown with a temporary subsidy buydown. If the seller is already paying to reduce your rate temporarily, you cannot also finance additional points.

How Lenders Calculate Your Loan-to-Value Ratios

Lenders calculate your loan-to-value ratio using the full loan amount including the financed points. This "gross LTV" determines your eligibility and mortgage insurance requirements.

Take that $400,000 loan example where you finance $8,000 in points. If you're buying a $500,000 home with a $50,000 down payment, your gross LTV is 81.6% ($408,000 divided by $500,000). This higher LTV affects your mortgage insurance requirements and may push you into a higher-cost tier.

The same calculation applies to your total LTV if you have a second mortgage or HELOC. Everything gets measured against the full financed amount, not just the base loan.

Qualifying Based on Your Bought-Down Payment

Your debt-to-income ratio gets calculated using the lower monthly payment from your bought-down rate. This is one of the main benefits of financing points rather than paying cash.

Using our example, a $400,000 loan at 7% has a principal and interest payment of $2,661. At 6.5%, the payment drops to $2,528. Even though your actual loan amount is $408,000, you qualify based on the $2,528 payment because that's what you'll actually pay.

For adjustable-rate mortgages, you still qualify based on the bought-down initial rate. The permanent buydown stays in effect throughout the loan term. When your rate adjusts, it adjusts from the lower bought-down rate, not the original rate.

Maximum Points You Can Finance

Fannie Mae limits financed permanent buydowns to three discount points maximum. The points are calculated based on your base loan amount before adding the point cost.

If your base loan amount is $400,000, three points would cost $12,000. Your final loan amount would be $412,000. You cannot finance more than three points even if you want a bigger rate reduction.

Each point typically reduces your rate by 0.25%, though this varies by lender and market conditions. Three points might lower your rate by 0.75%, but the exact reduction depends on current pricing.

How ARM Buydowns Work Long-Term

For adjustable-rate mortgages, the permanent buydown affects every rate adjustment throughout your loan term. Your initial rate gets reduced by the buydown amount, and future adjustments start from that lower baseline.

Say you get a 7/6 ARM with an initial rate of 6% and buy it down to 5.5%. After seven years, if rates have risen and your new rate would be 7%, you'd actually pay 6.5% because the buydown remains in effect.

The buydown doesn't change your margin, caps, or other ARM features. It simply reduces every rate by the same amount for the entire loan term.

Required Documentation

Your lender needs standard loan documentation plus details about the buydown structure. This includes the loan estimate showing both the base rate and bought-down rate, along with the cost of the financed points.

The closing disclosure must clearly show the financed points as part of your loan amount. Your promissory note will reflect the lower, bought-down interest rate as your actual note rate.

Your lender will also document that your debt-to-income ratio was calculated using the bought-down payment amount, not the payment based on your base loan amount.

Common Complications and Gotchas

The higher loan amount from financed points can push you over LTV limits or into higher mortgage insurance tiers. If you're close to 80% LTV, financing points might require mortgage insurance when paying cash for points wouldn't.

Credit fees and loan-level price adjustments get calculated on your gross loan amount and gross LTV. This can increase your overall costs beyond just the financed points.

Some borrowers assume they can finance unlimited points, but the three-point maximum is firm. Others think they can combine financed buydowns with seller-paid temporary buydowns, which isn't allowed.

For ARMs, borrowers sometimes don't understand that the buydown continues throughout the loan term. This is actually beneficial, but it's important to factor the ongoing benefit into your decision.

References

For the official guidelines, see 4601.1: Financed Permanent Buydown Mortgages in the Fannie Mae Selling Guide.