When mortgage rates surged in early 2022, most sellers faced an uncomfortable reality: Affordability had collapsed and buyers were pulling back; existing home sales slowed significantly, and inventories of unsold new homes rose to levels last seen during the Great Financial Crisis. But while individual sellers largely sat on the sidelines, builders can’t afford to wait out the market. As a result, they turned to a tool that helped them avoid price cuts: permanent mortgage rate buydown.
A permanent buydown allows a builder to lower borrower’s mortgage rate for the life of the loan through the use of “bulk forward commitment”. This is where a builder pays a fee in advance to purchase a commitment for large pool of mortgage money at a lower rate. Large builders are particularly well positioned to fund bulk forward commitments due to their size, scale, and ownership of mortgage lending subsidiaries.
Why don’t builders just cut prices instead? The main reason is that permanent buydowns are far more cost-effective. As we have previously illustrated, lowering the rate by 100 bps costs the builder roughly 3.2% of the sale price. To achieve the same monthly payment through a direct price cut, the builder would need to cut the price by 10%. Furthermore, once a builder cuts the price on one home, buyers would expect similar discounts for the entire subdivision.
Fast forward to 2025, permanent buydowns remain to be builder’s favorite tool. As of June 2025, around 64% of new homes sold by the largest builders used a permanent buydown, with the share for smaller builders hovering around 13%. The average buydown rate discount stands at around 1.3 ppts, which on average would cost an estimated 5% of the mortgage amount in builder concessions.
But there is another factor at work. Permanent buydowns funded through bulk forward commitments are excluded from the seller concession limits, which cap how much a seller can contribute toward the borrower’s closing costs. For Fannie Mae and Freddie Mac seller concessions are generally limited to 3-6% and for FHA the limit is generally 6%. Over 40% of sales by large builders have a combination of seller concessions plus permanent buydown cost in excess of 6%.
After 3.5 years of heavy use, permanent buydowns have become a structural feature of the new home market rather than a temporary response to higher rates. Builders are using them not just to move products but to prevent prices from falling. The result? Artificially elevated new home prices.
As of December 2024, home price appreciation (HPA) of new homes sold by the largest builders was about 6% above that for both existing homes and new homes sold by smaller builders. This gap implies that the use of permanent buydowns has enabled the largest builders to avoid a 10-12% price cut on those homes with a buydown. Without these incentives, new home prices would likely have mirrored the decline in the existing home sales market.
When these new homes eventually enter the resale market, their prices will likely have to adjust to reflect true market conditions. Permanent buydowns only delay this correction. Apart from distorting the market, they also disadvantage buyers who don’t use buydowns (such as cash buyers), who end up paying the inflated prices.
As noted, permanent buydowns funded through bulk forward commitments are excluded from the seller concession limits. Given the extensive use of these buydowns and their effect on new home prices, it is time for the GSEs and the FHA to end this exemption.
Our analysis shows that if buydown costs were included, an estimated 25% of GSE loans and 66% of FHA loans for new homes sold by the largest builders would exceed the 6% limit on seller concessions, making many of today’s permanent buydowns unviable.
In practice, the GSEs and the FHA could close this loophole by requiring lenders to value the rate difference using MBS pricing. Since buydowns are funded through bulk forward commitments, the exact per-loan cost is not available; but the difference between the bought down rate and the market rate at loan origination can be used as a proxy of the buydown cost. Announcing this change with, say, a 6-month delayed implementation date would allow a glide path for implementation.
The emergence of permanent buydowns was a market reaction to the Federal Reserve’s aggressive monetary tightening, after the extended COVID period of mortgage rates at around 3% combined with rampant home price appreciation. But in doing so, builders have kept new home prices artificially high for too long, delaying an inevitable market correction. It is time to end the GSE and the FHA exemptions for permanent buydowns and allow new home prices to finally adjust to market realities.
