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Advantages for the borrower are lower mortgage payments upfront This allows the borrower a chance to refinance their loan after the initial two years in the hopes of getting a lower interest rate permanently It also allows the borrower to save money upfront for home renovations or to pad their savings Some borrowers may be expecting an income raise in the two years before the interest rate will increase to the note rate and will be enticed by the lower upfront payments

There are possible drawbacks to a 2-1 buydown agreement from the borrower’s perspective The agreement has a high upfront cost when funded by the borrower rather than the seller as a concession The guaranteed payment increase can also be disadvantageous for borrowers who will have to constantly adjust to increasing mortgage payments throughout the first 3 years of the loan Counting on an income increase or favorable refinance conditions can also be risky Additionally, any issues with the escrow payments being sent will result in the lender being personally responsible for the amount due

Buydown agreements can also be advantageous for the seller Sellers can pay for the buydown as a concession, making it easier and faster for sellers to sell their home for a desirable price This is especially helpful in a borrower’s market where there are more properties on the market than there are interested borrowers If the buydown is seller paid, the stipulation must be included in the purchase and sale agreement

Within a 2-1 temporary buydown transaction, lenders also face various requirements, depending on the investor These requirements include, but are not limited to, utilization of a separate custodial account for buydown funds, stipulations regarding refundability and fund allocation, and adherence to guidelines for use of funds in the stance of past-due and foreclosure accounts

In this current rate environment, the option for borrowers to be able to take advantage of this creative loan product is a strategic opportunity for all parties and helps keep the market evolving

How can we help? Elizabeth Dailey, JD, is a Regulatory Compliance Director with CLA She is a graduate of the University of New Hampshire and earned her juris doctor at New England Law She is admitted to the Massachusetts Bar

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Residential Mortgage Compliance Monitor is an educational resource for financial institutions, providing announcements, legislative summaries, and policy changes issued by state and national regulators Announcements also cover mortgage lending rules of HUD, Fannie Mae, Freddie Mac, and other mortgage agencies