A seller funds a 2-1 buydown on a note rate of 7%. The borrower asks what she qualifies at and what she pays in year 2. Under underwriting rules requiring qualification at the note rate, what qualification rate and year-two payment-equivalent rate apply?
Correct Answer
A) Qualification at 7%; year-two borrower payment equivalent to 6%
A. Qualify at 7%; the year-two payment equivalent is 6%. A 2-1 plan supplies payment relief equivalent to two percentage points in year one and one in year two: 5% then 6%. The stated underwriting rule uses the 7% note rate; subsidy funds supplement the borrower’s payments rather than rewriting that rate. Scope and exceptions: Qualification at note rate is stipulated here; do not apply it as a universal ATR rule to every product. Seller funding also requires checking applicable interested-party contribution limits. Source: Overview of Temporary Buydown — https://singlefamily.fanniemae.com/job-aid/loan-delivery/topic/overview_of_temp_buydown.htm Underwriting considerations — https://guide-selling.fanniemae.com/sel/b2-1.4-04/temporary-interest-rate-buydowns
Why This Is the Correct Answer
A. Qualify at 7%; the year-two payment equivalent is 6%. A 2-1 plan supplies payment relief equivalent to two percentage points in year one and one in year two: 5% then 6%. The stated underwriting rule uses the 7% note rate; subsidy funds supplement the borrower’s payments rather than rewriting that rate. Scope and exceptions: Qualification at note rate is stipulated here; do not apply it as a universal ATR rule to every product. Seller funding also requires checking applicable interested-party contribution limits.
Why the Other Options Are Wrong
Option B: Qualification at 6%; year-two borrower payment equivalent to 7%
It lowers qualification and eliminates the stated year-two relief.
Option C: Qualification at 7%; no year-two payment subsidy
It ignores the second year of the buydown.
Option D: Qualification at 5%; borrower payments equivalent to 5% in both years
It uses the subsidized first-year figure for qualification and both years.
Exam Tip
Temporary payment relief is not a permanent reduction in the contractual note rate.
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