B2-1.4-04, Temporary Interest Rate Buydowns (08/07/2024)

The table below provides the general requirements under which Fannie Mae purchases or securitizes loans subject to temporary interest rate buydown plans.

When the source of the buydown funds is an interested party to the property sale or purchase transaction, Fannie Mae’s interested-party contribution limits apply. (See B3-4.1-02, Interested Party Contributions (IPCs)B3-4.1-02, Interested Party Contributions (IPCs).)

When the lender funds the buydown, the buydown agreement must require that the funds in the buydown account be transferred to the new servicer if the mortgage is included as part of a subsequent transfer of servicing.

The buydown agreement must provide that the borrower is not relieved of the obligation to make the mortgage payments required by the terms of the mortgage note if, for any reason, the buydown funds are not available.

The buydown agreement may include an option for the buydown funds to be returned to the borrower or to the lender, if it funded the buydown, if the mortgage is paid off before all of the funds have been applied.

A copy of the buydown agreement must be included in the delivery documentation for the mortgage.

The following table lists the transaction types that are eligible and ineligible for temporary buydowns:

For specific ARM plan restrictions, refer to the following:

• B2-1.4-02, Adjustable-Rate Mortgages (ARMs)B2-1.4-02, Adjustable-Rate Mortgages (ARMs), and

• B5-4.1-02, Texas Section 50(a)(6) Loan EligibilityB5-4.1-02, Texas Section 50(a)(6) Loan Eligibility.

When underwriting loans that have a temporary interest rate buydown, the lender must qualify the borrower based on the note rate without consideration of the bought-down rate.

For qualifying requirements, see B3-6-04, Qualifying Payment RequirementsB3-6-04, Qualifying Payment Requirements.

Fannie Mae does not place a limit on the total dollar amount of an interest rate buydown.

The total dollar amount of an interest rate buydown must be consistent with the terms of the buydown period.

An interest rate buydown plan must provide for:

• a buydown period not greater than 3 years, and

• increases of not more than 1% in the portion of the interest rate paid by the borrower in each 1-year interval.

More frequent changes are permitted as long as the total annual increase does not exceed 1%.

The table below provides a list of buydown types.

The table below provides Fannie Mae requirements for treatment of buydown funds.

If the mortgage is liquidated or the property is sold during the buydown period, the lender should dispose of the buydown funds in the following manner:

When a lender includes a mortgage with a significant interest rate buydown—such as a 3-2-1 temporary interest rate buydown—in an MBS pool, there are restrictions on the maximum amount of loans that can have a significant temporary buydown. See C3-2-01, Determining Eligibility for Loans Pooled into MBSC3-2-01, Determining Eligibility for Loans Pooled into MBS, for additional information.

The following special feature codes must be delivered, depending on the type of interest-rate buydown:

• loans with moderate interest rate buydowns - SFC 009, or
• loans with significant interest rate buydowns - SFC 014.