source:
  type: guide
  id: va-m26-7-ch07-t07
  authority: VA Lenders Handbook (VA Pamphlet 26-7), Chapter 7, Topic 7 — Loans Involving
    Temporary Interest Bydowns
  description: VA Lenders Handbook (VA Pamphlet 26-7), Chapter 7, Topic 7 — Loans
    Involving Temporary Interest Bydowns.
  coverage_tier: operative
obligations:
- id: va-m26-7-ch07-t07-full
  canonical_id: va-m26-7-ch07-t07-full
  section: VA Lenders Handbook (VA Pamphlet 26-7), Chapter 7, Topic 7 — Loans Involving
    Temporary Interest Bydowns
  type: do
  tags:
  - regulator-direct
  - va
  - va-handbook
  - corpus-expansion
  - tier-operative
  primary_source:
    tier: 1
    authority: VA Lenders Handbook (VA Pamphlet 26-7), Chapter 7, Topic 7 — Loans
      Involving Temporary Interest Bydowns
    source_class: va-handbook
    source_url: https://www.benefits.va.gov/warms/pam26_7.asp
    snapshot_id: 0e2735cf8ca44400
    fetched_at: '2026-05-23T01:53:53Z'
    content_hash: sha256:74297ad4fadd5e592b5688f5567170f8c128f7c9749dd06edd59e735a69099d8
    paragraph_quote: '7. Loans Involving Temporary Interest Bydowns Change Date March
      11, 2019 • This chapter has been revised in its entirety. a. Description As
      a marketing tool, builders, sellers, or lenders will sometimes establish and
      fund escrows to temporarily reduce a borrower’s loan payments during the initial
      years of the mortgage. The borrower may also fund such an escrow for herself/himself
      as a financial management tool. VA will guaranty loans involving temporary interest
      rate buydowns, if otherwise eligible. A temporary interest rate buydown can
      be used in conjunction with any type of VA-guaranteed loan. b. Escrow Agreements
      Funds must be safely escrowed with an independent third-party escrow agent beyond
      the reach of prospective creditors of the builder, seller, lender, and the borrower.
      Exception. If the Federal National Mortgage Association is the holder, it may
      take custody of the funds. The escrow agent must make payments directly to the
      lender or servicer. The funds may be used only for payments due on the note.
      The funds may not be used to pay past due monthly loan payments. If the loan
      is foreclosed or prepaid, the funds must be credited against the Veteran’s indebtedness.
      Escrowed funds may not revert to the party that established the escrow. If the
      property is sold subject to, or on an assumption of the loan, the escrow must
      continue to pay out on behalf of the new owner. c. If Borrowers Income is Expected
      to Keep Pace with Payment Increases The loan application may be underwritten
      based on the first year’s payment amount if there are strong indications that
      the income used to support the application will increase to cover the yearly
      increases in loan payments. Routine cost of living increases cannot be used
      for this purpose. Increases resulting from confirmed future promotions or wage
      percentage increases guaranteed by labor contracts (for example, teachers, and
      auto workers) may be given favorable consideration. Continued on next page VA
      Pamphlet 26-7 Revised Chapter 7: Loans Requiring Special Underwriting, Guaranty,
      and Other Considerations 7-31 7. Loans Involving Temporary Interest Bydowns,
      continued c. If Borrowers Income is Expected to Keep Pace with Payment Increases,
      continued The assistance payments must run for a minimum of 1 year. Scheduled
      reductions in the assistance payments must occur annually on the anniversary
      of the first mortgage payment. The reduction in the assistance payments may
      be accomplished through annual payment increases in equal or approximately equal
      amounts, or equal annual increases in the interest rate. d. If it is Unclear
      Whether the Borrower’s Income Can Keep Pace with Increases The loan application
      must be underwritten based on the full payment amount if there are no strong
      indications that the income used to support the application can reasonably be
      expected to keep pace with the increases in loan payments. The buydown arrangement
      can be considered a compensating factor. If the residual income and/or debt-to-income
      ratio is marginal, the buydown plan (used to offset a short-term debts), along
      with other compensating factors, may support approval of the loan. See “Compensating
      Factors” in Chapter 4 of this Handbook. Provide a statement signed by the underwriter
      giving reasons for approval. The terms of the buydown arrangement are not limited
      to specific criteria such as a minimum or maximum number of years for application
      of the assistance payments. It is the lender’s responsibility to review and
      determine the acceptability of the buydown. Lenders must provide the Veteran-borrower
      with a clear, written explanation of the buydown agreement. A copy of the buydown
      and escrow agreements must accompany the loan submission. VA Pamphlet 26-7 Revised
      Chapter 7: Loans Requiring Special Underwriting, Guaranty, and Other Considerations
      7-32'
  judgment: false
