FHA temporary buydown rules

What the Handbook actually says

A temporary buydown pays down the borrower's interest rate for the first year or two, with the cost funded up front. People often ask whether FHA allows the common structures. The Handbook, read as a whole, is shorter on structure than the question suggests: it does not lay out a 2-1 or 3-2-1 schedule in the sections reviewed for this page. What it does state are guardrails for any buydown, and those are the subject here. For the payment arithmetic of a schedule, use the 2-1 buydown calculator.

Qualify on the Note rate

The key rule is that when a mortgage involves a temporary interest rate buydown, the lender must use the Note rate to calculate principal and interest for qualifying. The Note rate is the rate written in the promissory note, the rate that applies once the temporary reduction ends. This appears twice in the Handbook, once for loans underwritten through the TOTAL Mortgage Scorecard and once for manual underwriting. The consequence is that a buydown does not help a borrower qualify; it only softens the early payments. If the debt-to-income ratio only works at the reduced payment, the loan will not work under this rule. The debt-to-income calculator lets you test that on the Note rate.

The escrow requirement

The lender must establish an escrow for temporary interest rate buydowns. The escrow agreement has two prohibitions. It must not permit undistributed funds to revert to the provider if the property is sold or the mortgage is prepaid in full, and it must not let unspent funds go to the borrower in cash, unless the borrower's own funds were used to establish the escrow. Payments go from the escrow agent to the lender or servicer. If escrow payments are not received for any reason, the borrower is responsible for making the total payment described in the note. The practical reading: the buydown is a pot of money tied to the loan, and if a buydown is promised in a contract, the borrower should still be ready for the full note payment.

Counting the cost against the 6 percent limit

Sellers, real estate agents, builders and other interested parties may contribute up to 6 percent of the sales price toward the borrower's origination fees, closing costs, prepaid items and discount points. The Handbook says that limit also includes interested party payments for permanent and temporary interest rate buydowns and other payment supplements, interest payments for fixed-rate mortgages, mortgage payment protection insurance and the upfront mortgage insurance premium. Contributions above the actual costs or above 6 percent are treated as an inducement to purchase, and interested party contributions cannot be used for the borrower's minimum required investment. Premium pricing credits from a lender or third-party originator are excluded from the 6 percent, provided that party is not the seller, agent, builder or developer.

A worked example

On a $300,000 home the 6 percent ceiling is $18,000. If the seller already agrees to pay $6,000 of closing costs and $3,000 of prepaid items, $9,000 is left for a buydown and the other items in the same bucket, including the upfront premium if the seller pays it. A $10,000 buydown would put the seller over by $1,000 unless other items shrink. Enter a sales price and the other contributions above to see the room that is left.

Where temporary buydowns are not allowed

The Handbook says temporary interest rate buydowns are not permitted with refinance transactions and not permitted with adjustable-rate mortgage transactions. The reverse mortgage (HECM) sections also bar temporary buydowns. So the route is a fixed-rate purchase loan. Servicing rules matter later too: for a mortgage with a buydown, the lender computes a loss-mitigation payment on the Note rate without the temporary reduction.

Limits of this page

The Handbook text is the policy; contracts, state law, lender overlays and the disclosure rules in the loan estimate sit on top of it. This page does not say how a buydown should be priced or which schedule is best, and it does not know your lender's rules.

Sources

• HUD Handbook 4000.1, FHA Single Family Housing Policy Handbook, Update 18 PDF: Underwriting the Borrower (Interested Party Contributions, Temporary Interest Rate Buydowns), Closing (Buydown Escrow Requirements), Refinances and Section 251 ARMs, Handbook pp. 202, 264, 367, 381, 445, 467. Read November 2, 2026.
• HUD, Single Family Housing Policy Handbook 4000.1 information page. Read November 2, 2026.

Text read: HUD Handbook 4000.1, FHA Single Family Housing Policy Handbook, the clean Update 18 PDF that HUD links from its Handbook 4000.1 information page (HUD lists it as the August 12, 2026 update). Section headings carry their own effective dates, given above for this page. A heading with two dates, such as (11/10/2026)(06/27/2025), shows a revised date written over the prior one. Confirm current dollar limits and premium rates with an FHA-approved lender. This page paraphrases the Handbook and does not replace it. Page numbers cited are the Handbook's own and may be approximate; use the section headings to locate the text.