In this blog, we will cover and discuss origination fees and discount points on mortgage loans. In the following paragraphs, we will discuss and cover understanding origination fees and discount points on mortgage loans. Gustan Cho Associates offer highly competitive mortgage options without LENDER OVERLAYS. We have no additional guidelines on our Conventional, FHA and VA mortgage products. This helps us help many borrowers with lower credit scores.
Lenders Requiring Higher Credit Score Requirements than the minimum Agency Guidelines
Most lenders will tell you to need a 620 score to enter into an FHA or VA loan. That is not true. With a 10% down payment, you may obtain an FHA loan with a credit score as low as 500 FICO. If you are a veteran who is eligible for VA mortgage financing, there is no credit score requirement. In the past, we have closed VA mortgages with credit scores below 500 FICO. Since we advertise our no overlay mortgage lending practices, many clients assume we have higher lending fees.
Origination Fees And Discount Points On Bad Credit Mortgages
That is not the case. While it is true that every lender has different origination costs, we must remain competitive to stay in business. Mortgage lending in 2022 is very much like putting gasoline in your vehicle. You may find it a penny or two cheaper across the street. But in reality, the cost of filling up your tank is virtually the same no matter which gas station you go to. You will not find gasoline for a dollar per gallon cheaper just as you won’t find a lender who offers a rate (or APR%) that is drastically different than the competition.
Lenders With Higher Fees and Higher Mortgage Rates
Some lenders may have higher fees and lower rates or vice versa. Many lenders will advertise low-interest rates. But, in reality, their fees are higher, costing you about the same in origination cost. It is important to pay attention to your annual percentage rate (APR) which shows you true loan costs represented as a percentage.
Understanding Origination Fees And Discount Points When Shopping For A Mortgage
When shopping for a mortgage loan, origination costs are very important. These costs will vary from lender to lender. No matter which lender you select, closing costs such as title insurance, taxes, insurance, and local fees will not vary. This is why you must pay attention to lender fees also called origination costs.
Understanding Mortgage Origination Costs
Origination costs on mortgage loans charged by lenders. Origination costs simply mean the cost of doing business with a specific lender. An origination cost will cover all the internal costs associated with your lender. These costs include processing, underwriting, closing, and funding. All of these areas are critical to your loan closing and are part of the mortgage process for every lender. Depending on your loan amount, origination fees typically range between 5% and 1% of your loan amount.
Understanding Mortgage Discount Points
Discount points are charged by mortgage lenders to pay down mortgage rates. Discount points are defined as a type of prepaid interest that can lower your overall interest payments over the life of the loan. One discount point is defined as 1% of your loan amount. One-point equals 1%. Paying one point does not lower your interest rate by a full 1%.
How Discount Points Affect Lower Mortgage Rates
There is no exact formula for how your rate will be affected by paying discount points. The fluctuation is based on the current market and current rates. The cost of points is also risk-based. So your credit score and down payment will change the outcome of buying your rate down. Your loan officer will send you a breakdown of discount points available to buy your rate down. Each loan is different, so make sure you are getting a breakdown from your licensed loan officer.
Case Scenario Of Using Origination Fees And Discount Points
Example – Let’s use an example in Chicago Illinois. The borrower has a 580-credit score. Since the credit score is lower, the borrower will expect to pay a higher interest rate. What many borrowers may not be aware of is the fact they will need to pay discount points in order to qualify for an interest rate. This amount can vary and usually is under 2%.
How To Buy Down Mortgage Rates With Buying Discount Points
Investors require an upfront interest payment to offer an interest rate for lower credit score borrowers. These costs can add up and it is important to know your financial obligation before entering into a contract. Our loan officers at Gustan Cho Associates will send you an estimated fee breakdown before you put an offer on a home. You need to make an educated decision when buying a long-term investment such as a home.
Using Sellers Concessions To Pay For Origination Fees And Discount Points
Homebuyers can use seller concessions to pay down the rate. Most of the time, lower credit score borrowers will negotiate seller-paid closing costs into their offer. This is a very common practice and will help minimize the out-of-pocket expense when buying a home. With lower credit scores, you may pay as much as 2% of the loan amount as origination charges. The good news is, with conventional financing you can ask for up to 3% of the purchase price if the seller paid closing costs.
Maximum Seller Concessions Allowed on Mortgage Programs
On FHA you can ask for up to 6% and VA up to 4%. This is usually MORE than enough to cover the closing costs on a property. Having the seller pay your closing costs leaves you responsible for the down payment. Once again, we want to stress the example above is not specific, actual closing costs may vary. Please contact us at Gustan Cho Associates and a licensed loan officer will go over specific rates and fees in your state.
Getting Qualified and Pre-Approved For a Mortgage
We are mortgage experts at Gustan Cho Associates. The team at Gustan Cho Associates strives to offer competitive mortgage financing options! We encourage you to check out our reviews as well as our YouTube CHANNEL. Since we do not experience lender overlays, many times we are able to save the day for clients who have been turned down by their current lender. If you have been turned down by your current lender or not getting the customer service necessary, please call Mike Gracz on 630-659-7644.
March 24, 2022 - 5 min read