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B2-1.4-04, Temporary Interest Rate Buydowns (07/29/2014)

Introduction
This topic contains information on temporary interest rate buydowns, including:

Provisions for Temporary Interest Rate Buydown Plans

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

✓ General Requirements for Loans with Temporary Interest Rate Buydown Plans
  Temporary interest rate buydowns are allowed on fixed-rate mortgages and certain ARM plans for principal residences or second homes provided the rate reduction does not exceed 3%, and the rate increase will not exceed 1% per year.
  The buydown plan must be a written agreement between the party providing the buydown funds and the borrower.
  All of the terms of the buydown plan must be disclosed to Fannie Mae, the mortgage insurer, and the property appraiser.
  The mortgage instruments must reflect the permanent payment terms rather than the terms of the buydown plan. In no event may the buydown plan change the terms of the mortgage note.

Buydown Funds Provided by Interested Parties to the Transaction

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).)

Lender-Funded Buydowns

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.

Buydown Agreements

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.

Eligible Transaction Types

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

Transaction Type Eligibility
Principal residence Eligible
Second homes Eligible
Investor properties Ineligible
Cash-out refinance transactions Ineligible
ARMs Restricted

For specific ARM plan restrictions, refer to the following:

Qualifying the Borrower

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.

Terms of the Buydown

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 36 months, and

  • increases of not more than 1% in the portion of the interest rate paid by the borrower in each 12-month interval.

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

Buydown Funds

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

✓ Requirement
  Buydown accounts must be established and fully funded by the time the lender submits the mortgage to Fannie Mae for purchase or securitization.
  Funds for buydown accounts must be deposited into custodial bank accounts.

Note: Buydown funds cannot be included in accounts with the lender’s other corporate funds.
  The borrower’s only interest in buydown funds is to have them applied toward payments as they come due under the note.
  Buydown funds are not refundable unless the mortgage is paid off before all the funds have been applied.
  Buydown funds cannot be used to pay past-due payments.
  Buydown funds cannot be used to reduce the mortgage amount for purposes of determining the LTV ratio.

Disposing 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:

Status of Mortgage Disposition of Funds
The mortgage is paid in full. The funds should be credited to the total amount required to pay off the mortgage, or they may be returned to either the borrower or the lender as specified in the buydown agreement.
The mortgage is foreclosed. The funds are used to reduce the mortgage debt.
The property is sold and the mortgage is assumed by the purchaser. The funds may continue to be used to reduce the mortgage payments under the original terms of the buydown plan.

MBS Pool Considerations

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.

Delivery Requirements

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

If the temporary interest-rate buydown provides for Then the mortgage loan must be identified with

  • a difference of 2 percentage points or less between the actual note rate and the “bought-down” interest rate, or

  • a buydown period of 2 years or less,

 SFC 009

  • a difference of more than 2 percentage points between the actual note rate and the “bought-down” rate, or

  • a buydown period greater than 2 years,

 SFC 014
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