Seller-paid buydowns, explained.

Two kinds of buydown

A buydown lowers the interest rate you pay, and there are two kinds that work very differently.

A temporary buydown lowers your payment for the first one or two years, then steps up to the full payment. The rate on your note never changes. The common versions are the 2-1, the 1-1, and the 1-0.

A permanent buydown uses discount points, paid at closing, to lower the note rate itself for the life of the loan.

Most seller-paid buydowns are temporary, so that's what most of this page is about.

How a 2-1 buydown works

In year one you pay as if the rate were two percentage points below your note rate. In year two, one point below. From year three on, you pay the full note-rate payment, which is the payment you qualified for.

A 1-1 buydown takes one point off for two years. A 1-0 takes one point off for year one only.

Where the seller's money goes

The lender still receives the full note-rate payment every month. The difference between that and what you pay comes out of a buydown account that the seller funds at closing.

• The cost is worked out exactly: the difference between the full payment and the reduced payment, for every month of the buydown.
• The seller covers that amount as a credit at closing, and it goes into the buydown account.
• Each month you make the reduced payment, and the difference is drawn from the account.
• When the account runs out, your payment steps up to the full note-rate payment.

If you refinance or sell before the account is used up, the buydown agreement determines how the remaining funds are handled. They may reduce your payoff amount or be returned as the agreement allows. Confirm those terms with your lender before closing.

Why a seller would pay for it

A credit toward a buydown costs the seller exactly what the same amount off the price would. Either way, it comes out of their proceeds.

What changes is what the buyer gets for it. A price cut shrinks the loan a little, so it lowers the payment a little, spread across thirty years. The same money spent on a buydown lowers the payment a lot in the first year or two, when a new owner is most stretched. And the sale price stays where it is, which matters to a seller watching the comps.

That's the trade: the seller gives up proceeds, not price.

What a buydown doesn't change: qualifying

You qualify at the full note rate, not the bought-down rate. The lender needs to know you can make the payment you'll be making in year three, so that's the payment it underwrites. A temporary buydown lowers what you pay. It doesn't change what you qualify at.

The same is true for an investor on a DSCR loan. The ratio is calculated at the full note rate, or at the interest-only payment on an interest-only loan, so a buydown doesn't turn a deal that falls short into one that qualifies.

Where it helps investors

On a rental that already qualifies, a seller-paid buydown puts real money back in your pocket in years one and two. Those are the years a rental is most exposed: the first vacancy, the first turnover, and the repairs nobody spotted at inspection. Lower payments while you find your feet as a landlord make that stretch easier to carry.

The limits

Sellers can't contribute unlimited amounts. Every loan program caps seller contributions, and the cap depends on the loan type, how you'll use the property, and how much you're putting down. The buydown counts toward that cap along with any other credits. We'll tell you the limit for your deal before you write the offer.

A temporary buydown also works best when you've planned for the step-up. If rates fall, you may be able to refinance, with unused buydown funds handled under your agreement. If they don't, your payment rises to the full note-rate payment you qualified for, so make sure that number works on its own.

Temporary or permanent?

Discount points lower the note rate for the life of the loan. They usually cost more upfront for a smaller monthly saving, and you need to keep the loan long enough to earn the cost back. A temporary buydown puts the saving up front, into the first year or two. Which is better depends on how long you'll keep the loan and who's paying.

The buydown calculator shows a 1-0, 1-1, and 2-1 buydown and discount points side by side on your own numbers, including the seller credit each one needs, your cash to close, and how long the points take to pay for themselves.