Freddie Mac Guidelines: Temporary Buydown Plans for Home Possible Mortgages

What Temporary Buydown Plans Mean for Home Possible Borrowers

A temporary subsidy buydown plan lets someone else pay part of your mortgage interest for the first few years. This reduces your monthly payment during the buydown period. The "someone else" is typically the home seller, builder, or a family member who wants to help you qualify for the loan.

Here's how it works in practice. Say you're buying a $200,000 home with a Home Possible mortgage at 7% interest. Your normal payment would be about $1,331 per month. With a 2-1 buydown, the seller might pay extra money at closing to reduce your rate to 5% in year one and 6% in year two. Your payments would be $1,074 in year one, $1,199 in year two, then jump to the full $1,331 in year three.

The key point: you still qualify based on the full $1,331 payment. The buydown doesn't help you qualify for a larger loan amount. It just gives you breathing room in the early years.

How Buydown Plans Work with Home Possible Mortgages

Fannie Mae allows the same buydown structures for Home Possible loans that it permits for conventional mortgages. The most common options are 3-2-1, 2-1, and 1-0 buydowns.

A 3-2-1 buydown reduces your interest rate by 3% in year one, 2% in year two, and 1% in year three. After that, you pay the full note rate. A 2-1 buydown cuts the rate by 2% in year one and 1% in year two. A 1-0 buydown gives you a 1% reduction in year one only.

The person funding the buydown pays a lump sum at closing. This money goes into an escrow account that your loan servicer uses to make up the difference between your reduced payment and the full payment amount each month.

Property and Loan Restrictions

Home Possible mortgages with buydown plans work only on 1-2 unit properties. You cannot use a buydown on a 3-4 unit property, even though Home Possible loans normally allow up to 4 units.

This restriction exists because Fannie Mae views larger rental properties as having different risk profiles. The buydown benefit is designed for owner-occupants who need help with affordability in the early years of homeownership.

If you're buying a duplex and plan to live in one unit while renting the other, you can still use a buydown plan. The property just needs to stay within the 1-2 unit limit.

Second Mortgage Requirements

If you're combining your Home Possible mortgage with a second mortgage, that second loan must have a fixed interest rate when you use a buydown plan. This includes Affordable Second loans that require you to start making payments before your 61st payment on the first mortgage.

Say you're using a Home Possible first mortgage with an 80% loan-to-value ratio, plus a 10% second mortgage from a local housing program. If you want a buydown on the first mortgage, that second mortgage cannot have an adjustable rate.

This rule prevents you from having two loans with changing payment amounts at the same time. Fannie Mae wants to limit the payment shock risk when your buydown period ends.

Who Can Fund the Buydown

The buydown subsidy must come from an acceptable source. Sellers and builders commonly fund buydowns as a sales incentive. Family members can also contribute buydown funds as a gift.

You cannot fund your own buydown by increasing the loan amount or using borrowed money. The subsidy must be a true contribution from someone else, not a disguised way to finance more than the property's value.

Your lender will verify the source of buydown funds and ensure they meet Fannie Mae's gift and contribution requirements. The contributor may need to provide a gift letter and bank statements showing the funds' origin.

Qualifying and Documentation Requirements

Your lender qualifies you based on the full mortgage payment, not the reduced buydown payment. This means you need enough income to handle the payment when the buydown period ends.

The underwriter will calculate your debt-to-income ratio using the full principal and interest payment at the note rate. If your full payment would be $1,331 but your buydown payment starts at $1,074, you still need to qualify for the $1,331 payment.

You'll need standard Home Possible documentation: pay stubs, tax returns, bank statements, and employment verification. The buydown doesn't change these requirements.

Common Complications

Payment shock represents the biggest risk with buydown plans. Many borrowers focus on the low initial payment and don't prepare for the jump to the full amount. Make sure you can handle the full payment before the buydown ends.

Some borrowers assume they can refinance before the buydown expires. This strategy can backfire if interest rates rise or your financial situation changes. Plan as if you'll keep the loan through the entire buydown period.

Buydown funds must be available at closing. If the seller is funding the buydown but the deal falls through, you cannot typically transfer that arrangement to a new property. Each transaction requires its own buydown funding commitment.

References

For the official guidelines, see 4501.2: Temporary subsidy buydown plans for Home Possible® Mortgages in the Fannie Mae Selling Guide.