11.5 FUNDED BUYDOWN ACCOUNTS (10/05/16)

© RHS HB-1-3555 SFH Guaranteed Loan Program Technical Handbook

Funded buydown accounts are designed to temporarily reduce the borrower’s monthly payment during the initial years of the loan. Buydown funds may come from the seller, lender or other interested third party. The borrower is not permitted to fund the escrow account and must not be required to repay the funds. Lenders should not use funded buydowns to qualify a borrower who would not otherwise qualify for a mortgage. Careful evaluation should be made of the borrower’s ability to manage the payment increases that will occur under the terms of the buydown agreement.

 Funded buydown accounts must meet the following requirements:

 The mortgage loan must be underwritten at the note rate;

Buydown funds may come from the seller, lender or other third party; Buydown funds may not come from the borrower;

A buydown rate will not reduce the interest rate more than two percent below the note rate;

The assistance may not result in more than a one percent annual increase in the interest rate and the increase may only occur once a year;

The borrower must agree in writing that the buydown funds will be placed in an escrow and paid directly to the lender each month to reduce the monthly mortgage payment;

If the qualifying ratios exceed 29 and/or 41 percent at the full note rate, the lender must establish that the eventual increase in mortgage payments will not affect the borrower adversely and lead to default. The lender must document the compensating factors which indicate the borrower’s ability to meet the expected increases in loan payment such as:

The borrower has a potential for increased income that would offset the scheduled payment increases, as indicated by job training or education in the borrower’s profession or by a history of advancement in the borrower’s career with increases in earnings.

The borrower has demonstrated ability to devote a greater portion of income toward housing expenses.

The borrower has substantial assets available to cushion the effect of the increased payments.

The buydown account must be fully funded at origination; and

The funds must be placed in an escrow account with a financial institution supervised by a Federal or state agency.

A copy of the escrow agreement, signed by the borrower and the provider of the funds, must be retained in the lender’s loan file. The underwriter’s documentation that establishes whether the borrower is likely to be able to handle the payment increases and the possible “payment shock” associated with such financing arrangement will be provided with the request for guarantee. Additional information regarding a temporary interest rate buydown can be found at Chapter 9, Paragraph 9.11 B. of this Handbook.