How to qualify for a rate buydown as a first-time homebuyer
As a first-time homebuyer, a temporary rate buydown can make your first few years of mortgage payments more affordable. By reducing your monthly payments, temporary buydowns can help you ease into your mortgage and build valuable equity. This guide explains how to qualify and when it’s worth it.
What is a temporary buydown?
A temporary buydown is a financing arrangement that helps a homebuyer secure reduced interest rates on their mortgage payments for a certain number of years. Mortgage interest rates can significantly impact your monthly payment, so interest rate reductions can make a big difference. Mortgage interest rates can significantly impact your monthly payment, so interest rate reductions can make a big difference.
They’re different from discount points, which are permanent rate buydowns in the form of additional upfront fees.
How do temporary buydowns work?
Usually, a seller, builder or even a lender will front the cost as an incentive to buyers. Sometimes, buyers have the option to pay for a temporary buydown via prepaid interest. Once the temporary buydown period is over, the homeowner begins paying the original interest rate.
What kinds of temporary buydowns are there?
Guild offers three different temporary buydown arrangements depending on your goals.
- One-year buydown (1-0)
- Two-year buydown (1-1 or 2-1)
- Three-year buydown (3-2-1)
| Year | One-year buydown | Two-year buydown | Three-year buydown |
|---|---|---|---|
| Year 1 | Rate reduced by 1% | Rate reduced by 1% or 2% | Rate reduced by 3% |
| Year 2 | Rate returns to note rate | Rate reduced by 1% | Rate reduced by 2% |
| Year 3 | Rate returns to note rate | Rate reduced by 1% | |
| Year 4 | Rate returns to note rate |
How first-time buyers can qualify
Strong credit score
- Aim for 620 or higher for most conventional loans.
- FHA loans may allow lower scores, but higher scores improve your chances of getting approved. Plus, you may get better terms.
Low debt-to-income (DTI) ratio
- A lower DTI ratio can help you qualify for better financing terms. 36 percent or less is an ideal ratio for most scenarios, but there are also several different financing options that accept higher DTI ratios.
Sufficient cash reserves
- Have funds for closing costs or prepare to negotiate with sellers to cover the buydown.
Working with the right lender
- Some lenders offer exclusive buydown programs to first-time buyers. Guild buyers can take advantage of the Payment Advantage program, a 1-0 temporary buydown that Guild covers*. Combined with Guild’s Payment Protection program, buyers can refinance with zero lender fees if rates dip later on**.
Builder or seller contributions
- In a buyer’s market, you can often negotiate with sellers or builders to cover the cost of the buydown.
Additional tips
- Use Guild’s buydown calculator to estimate savings.
- Ask your lender about FHA, VA or USDA loan compatibility.
- Consider pairing a buydown with down payment assistance programs.
Conclusion
Temporary rate buydowns can help first-time homebuyers ease into homeownership. By assessing your finances and working with an experienced lender, you may qualify for terms that reduce your monthly payments, so you can stop saving and start building wealth through homeownership.
*The Payment Advantage and Payment Advantage Plus programs are a promotional offer from 11/10/2022 to 12/31/2025. The Payment Advantage program is a promotional primary purchase offer on a Conventional 1-year lender-paid temporary buydown. The Payment Advantage Plus program requires seller participation to provide a seller incentive to temporarily reduce the rate by 2% for the first year. The lender promotional offer will temporarily reduce the rate by 1% for either the first or second year of the conventional mortgage on conforming and high balance loan limits. The lender and seller-paid credit will fund the buydown escrow account, and the funds will be dispersed out of the buydown escrow account during the first 12 or 24 months of the loan.
**For Payment Protection program full terms and conditions, visit www.guildmortgage.com/homebuyer-protection.
The above information is for educational purposes only.
Borrower must meet program eligibility and qualify based on the note rate of the program selected. All information, loan programs & interest rates are subject to change without notice. All loans subject to underwriter approval. Terms and conditions apply.