A 2-1 buydown is a temporary buydown that lowers the interest rate you pay by 2 percentage points in year one and 1 point in year two. From year three on, you pay the full note rate. The cost is paid upfront into an escrow account, usually by the seller, builder, or lender, and that account covers the difference each month. You still qualify at the full note rate, and the seller's contribution counts toward your loan's concession limit: 3% to 9% on conventional loans depending on down payment, 6% on FHA and USDA, and 4% on VA.
I'm Taylor Ring, a Mortgage Loan Officer with Fairway Independent Mortgage Corporation (The Wood Group) in Belton. Buyers in Killeen, Temple, Waco, and the Williamson County suburbs ask me about 2-1 buydowns when a seller or builder offers money toward the deal and they're deciding how to use it. This guide uses Fannie Mae's Selling Guide, HUD Handbook 4000.1, VA's buydown guidance and Lenders Handbook, USDA's regulations, and the current TSAHC and TDHCA program guides. I don't quote rates here; your rate depends on your loan, the day, and your file.
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How a 2-1 Buydown Works
Your mortgage note is written at the full rate. The buydown is a separate written agreement:
- Someone funds the account at closing. The amount equals the payment difference over the buydown period. Fannie Mae says the dollar amount "must be consistent with the terms of the buydown period."
- Each month, the account pays part of your payment. You pay the reduced amount; the escrow covers the rest.
- The reduction steps down each year. Year one is 2 points below the note rate, year two is 1 point below, and year three is the full rate for the rest of the loan.
- Your note never changes. Fannie Mae requires the mortgage documents to reflect the permanent terms; the buydown can't change the note.
VA's 2-1 Buydown Example
VA publishes this illustration on its temporary buydown page: a $300,000, 30-year fixed loan with a 5% note rate.
| Year | Rate You Pay | Your Payment | Monthly Buydown Contribution | Total Payment |
|---|---|---|---|---|
| 1 | 3% | $1,265 | $345 | $1,610 |
| 2 | 4% | $1,432 | $178 | $1,610 |
| 3 to 30 | 5% | $1,610 | $0 | $1,610 |
Adding it up from VA's numbers: $345 x 12 = $4,140 for year one, plus $178 x 12 = $2,136 for year two, a total of about $6,276 funded at closing. This is VA's illustration using principal and interest only, not a rate quote or offer. Your actual rate and payment will differ.
2-1 vs. 1-0 vs. 3-2-1
- 1-0: 1 point lower for year one only.
- 1-1: 1 point lower for two years.
- 2-1: 2 points lower in year one, 1 point lower in year two.
- 3-2-1: 3, 2, then 1 point lower over three years.
Fannie Mae caps temporary buydowns at a 3-point reduction, a 3-year period, and increases of no more than 1 point a year. It calls a buydown of 2 points or less for 2 years or less "moderate," which covers the 2-1. USDA limits buydowns to 2 points below the note rate, so a 3-2-1 doesn't fit a USDA loan. TSAHC allows 2-1, 1-1, and 1-0 only.
Why You Still Qualify at the Full Rate
Every program I checked says the same thing: the lender qualifies you on the note rate, not the bought-down rate.
- Fannie Mae: qualify the borrower "based on the note rate without consideration of the bought-down rate."
- FHA: use the note rate to calculate principal and interest.
- VA: qualify on the full payment owed after the buydown ends, though an underwriter may treat the buydown as a compensating factor.
- USDA: the loan is underwritten at the note rate.
So a 2-1 buydown doesn't raise how much house you can afford. It lowers what you actually pay for the first two years. If the escrow funds aren't there for any reason, Fannie Mae and HUD both say you're still responsible for the full payment under the note. My how much house can I afford guide shows how lenders set the qualifying payment.
Who Can Pay for a 2-1 Buydown, by Loan Type
| Loan Type | Who Can Fund It | Key Restrictions |
|---|---|---|
| Conventional (Fannie Mae) | Seller, builder, lender, other parties; interested-party funds count toward IPC limits | Fixed-rate (some ARMs restricted); principal residence or second home; not investment property or cash-out refinance |
| FHA | Seller, builder, lender, or other interested parties (counted in the 6% limit) | Not allowed on refinances or ARMs; escrow required |
| VA | Seller, lender, builder, or the Veteran | Fixed-rate loans, including purchase, cash-out, and IRRRL; seller or builder buydown is a seller concession |
| USDA Guaranteed | Not the borrower: no personal or borrowed funds | Max 2 points below note rate; increases at most 1 point a year; fully funded escrow with a regulated lender |
Sources: Fannie Mae B2-1.4-04; HUD 4000.1; VA temporary buydown guidance; 7 CFR 3555.151(h)(7).
About lender-funded buydowns: Fannie Mae says a lender credit from premium pricing isn't an interested-party contribution, and HUD excludes premium-pricing credits from its 6% limit. Fannie Mae also requires lenders to confirm the market rate and points behind any interested-party buydown so the subsidy cost is real. Ask exactly where the money comes from and how it shows up on your Loan Estimate.
Seller Concession Limits That Cap a Buydown
When a seller or builder pays for the buydown, it counts toward the program's limit on interested-party contributions.
| Loan | Limit | Based On |
|---|---|---|
| Conventional, principal residence or second home, over 90% LTV | 3% | Lower of price or appraised value |
| Conventional, 75.01% to 90% LTV | 6% | Lower of price or appraised value |
| Conventional, 75% LTV or less | 9% | Lower of price or appraised value |
| Conventional, investment property | 2% | Lower of price or appraised value |
| FHA | 6% | Sales price |
| VA | 4% (concessions only) | Reasonable value |
| USDA | 6% | Sales price |
How each program counts it:
- Fannie Mae (B3-4.1-02): a buydown subsidy from an interested party counts in the limit. Anything over the limit is treated as a sales concession and deducted from the price.
- FHA: the 6% limit specifically includes temporary and permanent buydowns. Contributions can't count toward your 3.5% minimum investment.
- VA: escrowed funds for a temporary buydown are a seller concession. VA's Lenders Handbook says normal discount points and the buyer's closing costs don't count toward the 4% cap, so a VA seller can often pay closing costs and still fund a buydown.
- USDA: seller or third-party contributions over 6% of the price make the purchase ineligible.
A seller who's covering closing costs may hit the limit fast on a low-down-payment conventional loan at 3%. My seller closing costs guide covers what sellers typically pay and how credits are written. For VA, see VA loans and the VA funding fee guide, since a seller paying your funding fee also counts as a concession.
2-1 Buydowns With Texas Assistance Programs
Fairway is a participating lender for both TSAHC and TDHCA programs, and their rules differ:
TSAHC (Homes for Texas Heroes, Home Sweet Texas)
TSAHC's program guidelines (revised September 9, 2026) say:
- Temporary buydowns of 2-1, 1-1, and 1-0 are allowed on all loan products, and permanent buydowns are allowed too.
- Not on Bond Loans. Temporary and permanent buydowns are not permitted on Bond Loans.
- Who can fund it: builder or seller, lender, or another interested third party as agency rules allow.
- Borrower-funded buydowns are not permitted.
- The temporary buydown agreement must be in the file.
See Homes for Texas Heroes and Home Sweet Texas.
TDHCA (My First Texas Home, My Choice, MCC)
TDHCA's Lender Guide (effective August 26, 2026) is stricter:
- My First Home options: buydowns are not allowed.
- My Choice: only permanent rate buydowns are allowed.
- TDHCA down payment assistance and HFC gift funds can't pay any buydown cost.
- Stand-alone MCCs: temporary buydowns are not permitted.
If a 2-1 buydown matters to you, it can steer which program fits. See My First Texas Home and the Mortgage Credit Certificate guide.
Temporary vs. Permanent Buydown vs. Price Reduction
When a seller offers a set dollar amount, you usually have three ways to use it:
- Temporary buydown (2-1): the biggest payment relief in years one and two, then the full payment. It helps if you expect your budget to grow, or you want breathing room for move-in costs.
- Permanent buydown (discount points): lowers the note rate for the life of the loan. Smaller monthly savings than year one of a 2-1, but it lasts. Seller-paid points count in the same concession limit on conventional and FHA loans; on VA, normal discount points don't count toward the 4% cap.
- Price reduction: lowers the loan amount for good, but the monthly effect is usually small.
I'll price all three on the same home for you, using that day's actual pricing, so you can compare total cost over the years you expect to keep the loan.
What Happens If You Refinance, Sell, or Someone Assumes the Loan
- Pay off early (refinance or sale): Fannie Mae says the agreement may return unused funds to the borrower, or to the lender if it funded them. HUD says unused FHA buydown escrow can't go back to the provider, or to the borrower in cash unless borrower funds set it up. VA says remaining funds are applied to the debt at payoff or foreclosure.
- Foreclosure: Fannie Mae and VA both say remaining funds go toward the debt.
- Assumption: under Fannie Mae and VA guidance, remaining funds can keep reducing payments under the original buydown terms for the new borrower. See my assumable mortgage guide.
Writing a Buydown Into a Texas Contract
On the standard TREC resale contract (TREC 20-19), seller money for the buyer usually goes in Paragraph 12A(1)(b), where the seller agrees to pay "an amount not to exceed $___ to be applied to Buyer's Expenses." Your agent writes the offer; I make sure the amount fits your loan's limit and the buydown is documented. VA says the written buydown agreement should show the property address, length of the buydown, amount, the bought-down rate, the original rate, and who holds the funds, and the Veteran and any co-borrowers sign it.
Questions to ask before you agree:
- What's the note rate, and what's the payment in year three?
- What does the buydown cost, and does it fit under my concession limit with closing costs?
- Who funds it, and how does it show on the Loan Estimate?
- Would the same money do more as a permanent buydown or closing cost credit?
Frequently Asked Questions
What is a 2-1 buydown?
A 2-1 buydown is a temporary buydown that lowers the interest rate a borrower pays by 2 percentage points in the first year and 1 point in the second year, then the full note rate applies for the rest of the loan. The cost is deposited into an escrow account at closing, usually by the seller, builder, or lender.
Do you qualify at the bought-down rate with a 2-1 buydown?
No. Fannie Mae, FHA, VA, and USDA rules all have lenders qualify the borrower on the full note rate payment, not the reduced first-year payment. A 2-1 buydown lowers what you pay in years one and two, but it does not increase the loan amount you qualify for.
Who pays for a 2-1 buydown?
A seller, builder, or lender usually pays for it, and VA also allows the Veteran to fund it. USDA does not allow the borrower to use personal or borrowed funds, and TSAHC does not allow borrower-funded buydowns. Seller and builder payments count toward the loan program's interested-party or seller concession limit.
Can I use a 2-1 buydown on an FHA or VA loan?
Yes. FHA allows temporary buydowns on purchases but not on refinances or adjustable-rate loans, and seller-paid buydowns count in FHA's 6% limit. VA allows temporary buydowns on fixed-rate loans, and a seller or builder buydown counts toward VA's 4% seller concession cap.
What happens to the buydown money if I refinance or sell?
It depends on the loan and the buydown agreement. Fannie Mae allows the agreement to return unused funds to the borrower, or to the lender if it paid, when the loan is paid off early. VA applies remaining funds to the loan balance. FHA does not let unused funds go back to the provider.
Thinking About a Buydown on Your Next Offer?
Send me the seller credit you're working with, and I'll show you the payment with a 2-1 buydown, a permanent buydown, and a straight credit, all inside your loan's limits.
Get Pre-Approved | Book a Free Consultation
Related Guides
- Seller Closing Costs in Texas
- Closing Costs in Texas
- FHA vs. Conventional Loans in Texas
- Homes for Texas Heroes
- How Much House Can I Afford in Texas?
- VA Loans
Sources
- Fannie Mae Selling Guide: B2-1.4-04, Temporary Interest Rate Buydowns (08/07/2024) and B3-4.1-02, Interested Party Contributions (05/07/2025)
- HUD: Single Family Housing Policy Handbook 4000.1 (last revised August 12, 2026): Interested Party Contributions, temporary buydown escrow requirements, refinance and ARM restrictions
- U.S. Department of Veterans Affairs: Temporary Buydowns and Lenders Handbook (M26-7), Chapter 8, Topic 5, Seller Concessions
- USDA Rural Development: 7 CFR 3555.151 (buydown accounts) and 7 CFR 3555.102 (seller concessions)
- Texas State Affordable Housing Corporation: Guidelines for Down Payment Assistance and Mortgage Credit Certificates (revised September 9, 2026)
- Texas Department of Housing and Community Affairs: Lender Guide (effective August 26, 2026)
- Texas Real Estate Commission: One to Four Family Residential Contract (Resale), TREC 20-19
Taylor Ring, NMLS #2809683 | Fairway Independent Mortgage Corporation, NMLS #2289 | The Wood Group of Fairway, 127 Lake Rd Ste 300, Belton, TX 76513 | Equal Housing Opportunity. This is not a commitment to lend. All loans are subject to credit approval and program guidelines, and approval, rates, and program availability are not guaranteed. This article is general information, not legal or tax advice. Not affiliated with or endorsed by Fannie Mae, HUD, the Federal Housing Administration, the U.S. Department of Veterans Affairs, USDA Rural Development, TSAHC, TDHCA, TREC, or any government agency. Contact your lender or the program directly for official buydown terms.