Fannie Mae 3/2/1 Buydown Rules California 2026: What Sellers Can Pay

I’m Michael DiVita — DRE #01372066 | NMLS #241655, DiVita Home Finance (DRE #01818285 | NMLS #323700), Tiburon, CA. I’ve been in California mortgage lending since 2000 and founded DiVita Home Finance in 2007. I model 3/2/1 buydown scenarios for California buyers regularly — the math is straightforward once you know the Fannie Mae rules that govern what sellers can contribute and how the escrow works. Call (800) 239-1103.

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: 6.75% note rate on a $750,000 loan.

• Year 1: buyer pays as if rate were 3.75%
• Year 2: 4.75%
• Year 3: 5.75%
• Year 4+: full 6.75%

The seller funds the shortfall — roughly $28,000–$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. This prevents approval at a teaser rate the borrower can’t sustain long-term.

Eligible loan types: 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 those dollars for a 3/2/1 buydown, or use them to buy permanent discount points that reduce the rate for the life of the loan. 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 lower your rate.

The 3/2/1 wins when: You’re confident rates will fall and you’ll refinance before year four. The temporary payment reduction is essentially free if you refinance out of the buydown period into a permanently lower rate.

Permanent points win when: You’re staying long-term (7+ years) with no expectation of refinancing soon. The permanent rate reduction delivers more total interest savings over time.

Run both scenarios side by side before deciding. On a $800,000 California purchase, the difference in total cost between the two strategies can exceed $30,000 over seven years depending on your assumptions.

California Market Context

In California markets where seller concessions have become more available — inland markets, properties with extended days-on-market, new construction — combining a 3/2/1 buydown with other seller-paid closing costs is a viable negotiating strategy. In competitive Bay Area markets where sellers regularly receive multiple offers, asking for a buydown can hurt your offer’s competitiveness. Know your market before structuring the offer.