A buy-down is literally what it says - you are buying down the interest rate on the loan in order to qualify at a lower interest rate. This allows you to qualify for more house with the same income. Here's how it works: assume your loan normally has an 8% (fixed) interest rate. You can buy it down to 6% and qualify at 6% on a 2/1 buydown. Your interest rate will be 6% the first year, 7% the second year, and 8% thereafter for the remaining 28 years of the loan term.

3/2/1 and 1/0 buydowns are also available, though less common. In order to actually buy the rate down like this, you need to prepay the difference in payments between the 6% and 8% rates the first year, and between the 7% and 8% rates the second year.