FHA 2/1 Buy Down Program

[Courtney Edwards]

Can anyone familiar with FHA 2/1 Buy Down Program shed a little light. From my understanding its a loan that allows you to buy down your interest rate for the first two years of your mortgage. The third year your mortgage rate returns to the fixed interest rate that you obtained at the beginning of the loan. My assumption (which could be what is causing my confusion) is that a homebuyer who is seeking a lower monthly payment for two years is doing so due to financial constraints and needs time to adjust to a mortgage payment and the expenses that come with owning a home. Does that type of homebuyer have the upfront money to buy down the interest as well as cover the other expenses of purchasing a home (downpayment, inspection, attorneys fees, etc.)?

[Chris Mason]

Originally posted by @Courtney Edwards:

Can anyone familiar with FHA 2/1 Buy Down Program shed a little light. From my understanding its a loan that allows you to buy down your interest rate for the first two years of your mortgage. The third year your mortgage rate returns to the fixed interest rate that you obtained at the beginning of the loan. My assumption (which could be what is causing my confusion) is that a homebuyer who is seeking a lower monthly payment for two years is doing so due to financial constraints and needs time to adjust to a mortgage payment and the expenses that come with owning a home. Does that type of homebuyer have the upfront money to buy down the interest as well as cover the other expenses of purchasing a home (downpayment, inspection, attorneys fees, etc.)?

 It used to be the case that people who couldn't qualify would use buydowns in order to qualify, because the temporarily bought down rate was what was used to qualify. Since the math always favored the bank big-picture, that was the only reason it was ever used. Now the normalized rate is used for qualification purposes, so it's never done.

In theory you might have someone at a 20% DTI who would prefer to be at a 15% DTI for that first couple years, but IRL people at 20% DTI are those very same people who can just do the math to realize that this heavily favors the bank, and such a person (who could qualify either way) would never do it.

I certainly applaud that you're looking into wonky guideline provisions and how you might hack a glitch in the matrix, but this is the wrong glitch to be trying to hack, unless your time machine allows you to travel to 2005. :)

The closest to this that now exists, for the cash heavy but income modest, is buying out the PMI upfront on a conventional mortgage, rather than ever making a monthly PMI payment. There is also split premium PMI, where you pay perhaps 1.25% of the loan amount upfront as a one-time insurance premium, and your monthly PMI is reduced by 3/4 for the life of the loan -- that DTI with the reduced PMI is used for qualifying purposes. I specialize in PMI stuff, apparently, since I make the lists that get PMI sales reps' attention and they randomly show up to my office with PMI-company branded fidget spinners and golf balls (I don't golf...).