Rising rates can make a Paia purchase feel just out of reach, even when the fit is right. If you’re selling, you may be tempted to cut price to keep momentum. There’s another way both sides can win: a seller-funded interest-rate buydown. In this guide, you’ll learn what buydowns are, how they work with popular loan programs, where they fit in the Paia market, and how to structure them cleanly so your deal stays on track. Let’s dive in.
What a seller buydown is
A seller buydown happens when the seller contributes funds to lower the buyer’s mortgage interest rate. This can be temporary or permanent.
- Temporary buydown: your rate drops for a set period, often a 2-1 or 3-2-1 structure. Lenders place the funds in a custodial account and apply them to reduce the payment during the buydown period. Agency rules outline how this must be documented and handled. See the program rules from Fannie Mae on temporary buydowns.
- Permanent buydown: discount points paid at closing reduce your interest rate for the life of the loan.
Under most agency guidelines, you still qualify at the permanent note rate. A buydown improves early cash flow but does not change underwriting. Fannie Mae’s guidance explains this.
Temporary vs. permanent
Temporary buydown basics
- Common formats are 2-1, 3-2-1, or 1-0.
- Funds are held in a separate account and applied monthly per a written buydown agreement. The agreement details the schedule, funding source, and what happens if the loan is paid off early. See Fannie Mae’s requirements.
Permanent points basics
- Paying discount points lowers your rate for the full term.
- Buyer tax treatment depends on IRS tests. Seller-paid points may be deductible to the buyer in the year paid if the IRS criteria are met, and they must be reported correctly by the lender. Review the IRS Instructions for Form 1098 and IRS Publication 530.
Program rules and caps
Interested-party contribution limits apply to many loans. These caps include seller-paid buydowns, points, and certain closing costs.
Conventional loans
- Seller contributions are capped by down payment and occupancy. Typical limits are about 3 percent with less than 10 percent down, 6 percent with 10 to 25 percent down, and 9 percent with more than 25 percent down. See Fannie Mae’s IPC policy.
- Temporary buydowns are permitted with limits on duration and rate step-ups. Borrowers qualify at the note rate. See Fannie Mae’s temporary buydown guide.
FHA loans
- FHA allows seller contributions up to 6 percent of the sales price for items such as discount points and temporary buydowns, subject to handbook rules. See HUD’s guidance in FHA resources.
VA loans
- VA permits temporary buydowns with specific escrow and documentation rules. Other seller concessions beyond normal closing costs may be subject to additional caps. Always confirm details with a VA-approved lender. See the VA’s page on temporary buydowns.
If contributions exceed program caps, lenders can treat the excess as a sales concession, which may affect loan-to-value calculations. Work closely with the lender to keep your structure compliant.
Why buydowns matter in Paia
Paia is a small, high-value North Shore market where price points and carrying costs can be significant. Data providers tracking the area show seven-figure list prices for many properties, with variability month to month. See a current snapshot in the Paia market report.
Statewide affordability has been tight in recent years, which is one reason concessions and buydowns have resurfaced to help buyers manage payments while sellers protect pricing. For context on Hawaii’s affordability pressures, see this reporting on statewide trends.
Property taxes also affect the monthly picture. Maui County uses tiered rates by classification, such as owner-occupied, non-owner-occupied, and short-term rental. Classification can change a buyer’s carrying costs and influence whether a buydown or price reduction makes more sense. Review the county’s tax classification overview.
When a buydown makes sense
- You want to preserve list price yet help buyers with early cash flow.
- Your buyer expects to refinance if rates ease and simply needs payment relief in years one and two.
- You are weighing a price cut but want to compare buyer benefit per dollar spent.
Example: a 2-1 buydown on a $1M loan
Here is an illustrative example. Your lender will produce exact figures.
- Loan amount: $1,000,000 at a 7.00 percent note rate, 30-year fixed.
- Payment at 7.00 percent (principal and interest): about $6,651 per month.
- Year 1 at 5.00 percent: about $5,368 per month. Monthly subsidy about $1,283.
- Year 2 at 6.00 percent: about $5,996 per month. Monthly subsidy about $655.
- Total seller contribution: roughly $23,256 over two years.
This gives the buyer meaningful payment relief early without changing qualification at the note rate.
How to structure a Paia buydown
Use a simple checklist to keep your deal clean and compliant.
- Confirm lender acceptance
- Ask the buyer’s lender if the specific loan allows the proposed buydown. Confirm how it will show on the Loan Estimate and Closing Disclosure, and verify the interested-party contribution cap. See Fannie Mae’s buydown guidance and IPC policy.
- Document the agreement
- Use a written buydown agreement with the schedule, total funds, and early payoff rules. Lenders require this as part of the closing package. See Fannie Mae’s documentation requirements.
- Track caps and concessions
- Add up discount points, temporary subsidies, and paid prepaid items that count toward the cap. If you would exceed the cap, consider rebalancing with a smaller buydown or a targeted price adjustment. Review Fannie Mae’s IPC policy.
- Set expectations on disclosures
- Lenders show the buydown funding and offsets on closing forms in specific ways. Ask for a sample LE/CD so both sides know what to expect.
- Plan for early payoff
- If the buyer sells or refinances while funds remain, the agreement should spell out where the money goes. See Fannie Mae’s rules on buydown accounts.
Price cut vs. buydown
Both can help a deal come together. The better choice depends on your goals.
Price reduction
- Pros: permanent lower basis for the buyer, simple to execute, may help with appraisal.
- Consider: reduces seller proceeds for good, buyer’s monthly impact might be smaller than a buydown of the same dollar amount.
Seller buydown
- Pros: larger near-term payment relief per dollar spent, especially with a 2-1 or 3-2-1 structure. Helpful if the buyer may refinance later.
- Consider: buyer still qualifies at the note rate. Caps apply and documentation must be precise.
Key tax notes
- Buyer deductibility: seller-paid points may be deductible in the year paid if IRS tests are met, including that points are customary, clearly labeled as points, and paid in connection with the purchase of a primary residence. See IRS Publication 530 and Form 1098 instructions.
- Seller treatment: seller-paid points are a selling expense that reduce the seller’s amount realized on the sale. See IRS Publication 530.
Common pitfalls to avoid
- Exceeding contribution caps for the loan type or occupancy.
- Forgetting that buyers qualify at the permanent rate, not the reduced buydown rate.
- Leaving out a clear buydown agreement or early payoff instructions.
- Ignoring Maui County tax classification, which affects the buyer’s monthly cost.
- Marketing an incentive without confirming lender approval and disclosure rules.
If you want to keep your Paia deal moving without chopping list price, a well-structured buydown can be a smart lever. Ready to compare numbers for your property or purchase plan? Reach out to Chaston Marcos Rs to walk through live scenarios tailored to your loan type, occupancy, and Maui goals.
FAQs
What is a seller buydown in Paia real estate?
- A seller buydown is when the seller funds a temporary or permanent rate reduction for the buyer’s mortgage to lower early monthly payments or the long-term rate.
How do temporary buydowns like 2-1 work?
- The seller deposits funds into a custodial account, which subsidize the payment so the rate is lower for one to three years. Borrowers still qualify at the note rate per Fannie Mae guidelines.
What are the seller contribution limits for conventional loans?
- Typical caps are about 3 percent with less than 10 percent down, 6 percent with 10 to 25 percent down, and 9 percent with more than 25 percent down. See Fannie Mae’s IPC policy.
Are seller buydowns allowed on VA or FHA loans?
- Yes. FHA allows seller contributions within its cap, and VA permits temporary buydowns with specific escrow and documentation rules. See FHA resources and the VA’s page on temporary buydowns.
Do seller-paid points affect my taxes as a buyer?
- Possibly. If IRS rules are met, seller-paid points may be deductible in the year paid for a primary residence. Review IRS Publication 530 and speak with a tax professional.
Why consider a buydown instead of a price cut in Paia?
- In a higher-rate environment with strong prices, a buydown can deliver larger near-term payment relief per dollar than a price cut while helping sellers preserve list price and neighborhood comps.
