Lenders will pay closing costs, as long as they can make a profit. The usual way to minimize the closing costs is by using premium pricing. Here's how premium pricing works. The lender can offer you a zero-point interest rate (or close to it), or the lender can give you a higher interest rate in exchange for closing cost assistance. Take a look at a typical wholesale rate sheet:
The interest rate is 2.5% with .361 points; or the lender can offer you an interest rate of 3.5% and pay 3.163 points (percent of your closing costs. Here's the arithmetic:
|Payment (principal and interest)||$790.00||$898.00|
In the previous example you accept a higher interest rate and monthly mortgage payment, but you have $6,326 to be used for the closing costs.
Lender paid mortgage insurance
Lenders are allowed to pay a percentage of the borrower's closing costs. The amount of the lender paid closing costs depends on the loan program. If the borrower is using a conventional mortgage to purchase a home or refinance an existing loan, the borrower will be required to pay the dreaded mortgage insurance. One of the payment options is Lender paid private mortgage insurance. With LPMI the lender pays the mortgage insurance on your behalf . . . but increases the interest rate to cover the expense.
The FHA permits lenders to pay closing costs through premium pricing. In other words, the lender increases the interest rate and then uses the increased interest rate to pay some, or all of the closing costs:
It is your right and responsibility to double-check the accuracy of your credit reports.
You have the right to ask for the faulty content on your credit reports to be removed if it does not accurately represent your consumer behavior.
The Fair Credit Reporting Act (FCRA), the Fair Credit Billing Act (FCBA), and the Fair Debt Collections Practices Act provide you with the legal right to dispute inaccurate information on your credit reports with credit bureaus and individual creditors (FDCPA).
The most frequent method for improving credit is to file a credit bureau dispute.
Under the Fair Credit Reporting Act, you have the right to dispute and have items on your credit report removed if you think they are inaccurate, late, misleading, prejudiced, incomplete, or unverified.
When you dispute a questionable negative credit item with the credit agencies, you're asking them to examine whether or not the item should be included on your credit reports.
If the credit agency is unable to verify the item's validity, they must either correct the listing or delete it from your credit report altogether.
Another element of credit restoration is working with creditors to remove negative entries from your credit reports.
Your creditors may delete negative information from your credit reports at any time.
A simple request to have a poor credit listing modified or deleted is all it takes when working with more cooperative creditors.
If this non-confrontational method isn't working, you may utilize the tools given by various consumer protection laws to compel creditors and collections agencies to verify the accuracy of the accounts reported.
Thousands of people have used some or all of their legal rights to fair and accurate credit reports to effectively repair their credit and raise their credit scores.
The conventional loans are mortgages that meet the lending rules of the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. The conventional loans are not backed by the federal government.
Conventional loans permit lender paid closing and prepaid costs (i.e. tax and insurance escrow, per diem interest). Like the FHA loans, the lender paid closing costs are made with an increased interest rate (premium pricing).
The United States Department of Agriculture also permits borrowers to use premium pricing to pay for the closing and prepaid expenses. The neat feature of the USDA loan program is that the USDA mortgage does not require a down payment. In short, 100% financing. Ask the lender for a 3% concession and get seller assistance up to 6%, and you just might be able to purchase a home with nothing out of pocket.
Frequently Asked Questions About Lender Paid Closing Costs
Q. Are lender fees and closing costs the same?
A. Some lender fees can include closing costs. For example, the lender may charge a fee for the credit report or appraisal. Those two fees are considered closing costs. Fees paid directly to the lender, such as an underwriting, processing, and other fees that are not paid to a third party are not technically closing costs, although those fees are frequently called closing costs.
Q. Are lender fees considered points?
A. Discount points are not really a lender fee, but an interest rate buy down cost. An origination fee is also called a "point", and some lenders use the term to obfuscate the word discount point, or, the origination fee can be a catch all percentage of the loan, which covers the lender's fees.
Q. Can the seller credit exceed closing costs?
A. It happens every day. The real estate agent or the lender overestimates the seller paid costs and the seller gets to keep the excess credit.
Q. Can the seller paid closing costs cover prepaids?
Q. Can sellers pay all closing costs?
A. The seller paid closing costs are limited to thehome buyer's mortgage program.
Q. Can I use a credit card for closing costs?
A. You are not allowed to use a credit card for the down payment, unless it is for collateralizing an asset. Speak to your lender before using a credit card for thedown payment or closing costs.
Q. Do closing costs have to be paid upfront?
Q. Do I need a mortgage broker?
A. If you have a low credit score, you need a mortgage broker, because the mortgage broker represents multiple lenders. Some lenders are more forgiving about a low credit score and other complications.
Q. How to choose a mortgage broker?
A. Most people choose a mortgage broker based on the interest rate. But borrowers must look beyond the quoted interest rate. Borrowers must ask the lender if the interest rate is "locked"; or is that interest rate nothing more that a fictitious interest rate to tease you into applying for a mortgage.
Another consideration when choosing a lender is the "lock-in" period? If the interest rate is indeed locked, the next question is "for how long"? One day, one week, 30 days or longer? If that great rate expires because the lock in period was too short to complete the mortgage application, then either you will get the new interest rate, which could be higher than the original interest rate, or you might have to pay a rate extension. That means, the interest rate is guaranteed for an extended period.
Other considerations when choosing a mortgage broker are the loan programs. Some mortgage brokers may not be able to offer you loan programs that are available to other lenders. For example, the FHA and VA agencies set a high bar for lenders. A mortgage broker may dissuade you from considering a government backed mortgage if the broker is unable to offer you one of these mortgages.
Q. How do mortgage brokers get paid?
A. Mortgage brokers can earn a commission from either the lender/bank or the mortgage applicant. In most cases, the lender/bank pays the mortgage broker's fee. The lender/bank will provide the broker with the "wholesale" rate sheet. The rate sheet will provide the broker with the interest rates that are being offered by that lender. The rate sheet will also contain "adjustments to the interest rate for the lock in period, adjustments for the down payment percentage, if the loan is for a purchase, or equity in the home for a refinance loan. The mortgage broker simply adds the commission to the interest rate cost.
Q. Is title insurance part of closing costs?
Q. Should I use a mortgage broker?
A. The decision to use a mortgage broker or a bank depends on your situation. If you're refinancing your mortgage and you have a great credit score, money in the bank, and have solid employment, then shopping mortgage brokers for the lowest interest rate is probably the best choice, however, if you're purchasing your first home, you should talk to both the banker and mortgage broker. Banks usually offer special financing to home buyers with low to moderate income. The bank programs are not shared with mortgage brokers and some in house programs offer a below market interest rate or lower closing costs or lower credit requirements.
Q. What does a mortgage broker do?
A. The mortgage broker is the middleman between the borrower and a wholesale lender, usually a bank. The mortgage broker will determine which loan program is appropriate for the borrower and process the loan application. After the paperwork is completed, the mortgage broker passes the application to the wholesale lender for their consideration . . . hopefully, approval.