The 3-2-1 buydown is a seller-paid financing concession that temporarily reduces a buyer’s mortgage rate for the first three years of the loan, then steps up to the fully indexed note rate in year four. Fannie Mae updated its guidelines for buydown structures in 2025, and California buyers considering this strategy in 2026 need to understand what qualifies and how the math works.
How the 3-2-1 Buydown Works
In a 3-2-1 buydown, the buyer’s effective rate is reduced by 3% in year one, 2% in year two, and 1% in year three — then resets to the permanent note rate from year four forward. The seller (or builder) funds an escrow account at closing that covers the difference between the buyer’s reduced payments and the full note rate payments during the buydown period. Example: 6.5% note rate on a $750,000 loan. Year one: buyer pays as if rate were 3.5%. Year two: 4.5%. Year three: 5.5%. Year four+: full 6.5%. The seller funds the shortfall — roughly $25,000–$35,000 for this example — into a buydown escrow at closing. Unused funds if the loan pays off early are returned to the seller, not the buyer.
Fannie Mae 3-2-1 Buydown Rules for California (2026)
Under Fannie Mae’s guidelines, 3-2-1 buydowns must meet specific requirements on conforming loans. Who can fund it: the seller, builder, real estate agent, or another interested party. The buyer cannot fund their own buydown on a Fannie Mae loan — only on non-QM products. Interested party contribution (IPC) limits: buydown funds count toward IPC caps. For primary residences with LTV above 90%, the IPC cap is 3% of purchase price. For LTV 75%–90%, the cap is 6%. For LTV below 75%, 9%. The buydown cost plus other seller concessions cannot exceed the applicable cap. Qualifying rate: Fannie Mae requires borrowers to qualify at the note rate (year four rate), not the reduced year-one rate. Loan types eligible: fixed-rate purchase loans. ARMs with 3-2-1 buydowns are generally not eligible on conforming products.
3-2-1 Buydown vs. Permanent Rate Reduction
When a seller is offering concessions, California buyers face a choice: use concession dollars for a 3-2-1 buydown, or negotiate for a lower price and use savings to buy down the permanent rate (discount points). The math isn’t always obvious. A 3-2-1 buydown front-loads savings in years 1–3, then expires — leaving you at the full note rate from year four forward. Discount points permanently reduce your rate for the life of the loan. For a buyer confident they will refinance before year four (expecting rates to fall), the 3-2-1 is often superior — temporary savings exceed the permanent reduction value over the relevant horizon. For a buyer expecting to stay long-term at the same rate, discount points may provide more total savings. Run both scenarios side by side with your broker before deciding.
Is a 3-2-1 Buydown a Good Deal in California?
A 3-2-1 buydown makes the most sense for buyers who expect rates to decline before year four — planning to refinance before the full note rate kicks in. If rates fall 1%+ before year four, you refinance out of the buydown period into a permanently lower rate, and the buydown savings were essentially free. If rates stay elevated and you remain in the property past year three at the full rate, the savings were front-loaded but the benefit diminishes after the buydown period expires. The seller-paid structure means the cost comes from the seller’s concession budget — savvy buyers negotiate the buydown as part of a broader offer package rather than accepting it in lieu of a price reduction. In some California markets where seller concessions have become more available, combining a buydown with other seller-paid closing costs is a viable negotiating strategy.
📞 Call or text Michael DiVita at (800) 239-1108 / (310) 849-9124 — we model 3-2-1 buydown scenarios for California buyers and find the optimal structure for your loan. NMLS #236429.
