What is high cost?
Some states have high cost rules. What is high cost? High cost is that the total fees and costs in obtaining a residential mortgage loan cannot exceed 5% of the mortgage loan amount. Fees that is calculated in high cost includes upfront mortgage insurance premium, yield spread premium, origination fees, underwriting fees, and other fees and costs associated with obtaining a mortgage loan.
High Cost Affects Smaller Size Loans
Just the FHA upfront mortgage insurance premium is 1.75% that automatically gets applied to the 5% high cost maximum limit. Even though the FHA mortgage upfront mortgage insurance is rolled into the mortgage loan, the high cost rules applies. If the mortgage lender’s yield spread premium is 3% and you have the upfront mortgage insurance premium of 1.75%, you are already at 4.75%. You only have 0.25% worth of credit to work with to cover fees and costs towards your mortgage loan and anything over 5% is considered a violation of high cost. Illinois is a high cost state. Florida is not a high cost state. So, if the mortgage lender charges a $900 underwriting fee on a smaller loan, you will be in violation of the high cost rules and cannot do the loan unless you get a sellers concession towards closing costs or a lenders credit towards closing costs.
Sellers concessions towards closing costs
Sellers concessions towards the buyers closing costs is one way of avoiding high cost rules. For example, if the seller wants a bottom line amount of $100,000 from the sale of the home, the seller can price it at $105,000 and give the buyer a sellers concession of $5,000 towards the buyers closing costs. However, if the closing costs only comes out to be $3,000, the remaining $2,000 goes back to the seller and the buyer is not allowed to pocket the difference. The maximum amount of sellers concessions towards a buyers closing costs is 6% of the purchase price. Make sure you do not waste the sellers concession because it will go back to the seller.
Lenders credit towards closing costs
What if the seller is not willing to give a buyer a sellers concession towards closing costs to off set the high cost laws. There are many instances where a sellers concession is difficult to get when the property is bank owned or HUD owned. On cases like these, the buyer can get a lenders credit towards closing costs by getting a higher mortgage rate. For example, if a mortgage loan borrower got a rate of 3.75% without any lender credit towards closing costs, he or she can opt for an interest rate of 4.0% or 4.25% with a lenders credit towards closing costs. The amount depends but normally can be anywhere between 1.0% to 3.0% of the mortgage loan amount.
2015 Update: Qualified Mortgages: QM Test
This paragragh is an update to this mortgage blog article post since it was written and published. The CFPB has launched QM, Qualified Mortgages, effective January 2014 and all mortgage loans needs to pass the QM Test. Qualified Mortgages are mortgage loans with emphasis with the ability to repay and mortgage lenders need to follow strict mortgage lending guidelines so the borrower is able to repay their mortgage loans and the costs and fees a mortgage loan borrower pays cannot exceed 3%.