Temporary Buydown Seller Concessions: How to Structure a 2-1 or 1-0 Buydown Without Violating IPC Limits

A seller-funded temporary buydown reduces the borrower's interest rate for the first one or two years of the loan in exchange for a lump sum funded at closing, typically from seller concessions. The structure has become a standard negotiating tool in markets where sellers prefer to close rather than cut the list price. MLOs who understand the IPC limits and lender requirements can offer this as a concrete benefit instead of a vague feature.

IPC Limits and Calculation

The buydown subsidy is an interested party contribution (IPC) and counts against the IPC limit for the transaction. Fannie Mae's IPC limits are: 3% of purchase price for LTV above 90%, 6% for LTV 75.01-90%, and 9% for LTV 75% or below (primary and second homes). The buydown cost is the present value of the interest savings over the buydown period. A 2-1 buydown on a $400,000 loan at 7% costs approximately $7,500-$9,000 depending on note rate. This amount must fit within the IPC limit after accounting for any other seller-paid closing costs.

How 2-1 and 1-0 Buydowns Work

• ✦2-1 buydown: rate is 2% below note rate in Year 1, 1% below note rate in Year 2, then at note rate for Years 3-30
• ✦1-0 buydown: rate is 1% below note rate in Year 1, then at note rate for Years 2-30
• ✦The borrower qualifies at the note rate, not the buydown rate, for DTI purposes
• ✦Unused buydown funds are typically applied to the loan balance if the borrower refinances or sells before the buydown period ends
• ✦The buydown account is held in escrow by the servicer and released monthly to cover the interest rate differential

Presenting to Listing Agents

A seller funding a $9,000 buydown in lieu of a $9,000 price reduction produces a better outcome for the buyer. The price reduction reduces the appraised value floor and may affect future comps; the buydown delivers tangible monthly savings in the first two years when cash flow matters most. Present the comparison as: $9,000 price reduction saves roughly $45 per month in P&I forever, while a $9,000 buydown saves $400+ per month in Year 1 and $200+ per month in Year 2 at a 7% note rate. The buydown wins on near-term cash flow, which is what most buyers need.