What Is a 2-1 Buydown on a Conventional Loan — and Should You Ask for One?

A 2-1 buydown is a seller-funded strategy that temporarily reduces your mortgage rate for the first two years. In today’s market it has become a powerful negotiating tool — here is exactly how it works.

What is a 2-1 buydown?

A 2-1 buydown is an arrangement where a third party — typically the seller or real estate agent — deposits funds into an account that subsidizes your mortgage payment for the first two years. Your rate is reduced by 2 percentage points in year one and 1 percentage point in year two. In year three and beyond, you pay the full note rate for the remaining term.

Example: If your note rate is 7.0%, you pay 5.0% in year one, 6.0% in year two, and 7.0% from year three onward.

Who can fund the buydown?

On conventional loans, the buydown must be funded by the seller, builder, or real estate agent — an interested party to the transaction. The borrower cannot fund their own buydown. The buydown funds count toward the interested party contribution (IPC) limit for the transaction, subject to the same 3–9% caps based on LTV.

How is the borrower qualified?

This is a critical point many buyers overlook: you are qualified at the full note rate, not the reduced buydown rate. Even though your payment in year one reflects a lower rate, the lender confirms you can afford the full note rate payment. The buydown simply subsidizes the difference — it does not change your qualifying income or DTI.

What happens if you sell or refinance early?

If you sell or refinance before the buydown period ends, unused buydown funds can be returned to the borrower or to the lender, depending on the buydown agreement terms documented at closing.