Lender Credit And Sellers Concessions For Closing Costs
This Article Is About Lender Credit And Sellers Concessions For Closing Costs
There are fees and costs involved in a home purchase mortgage loan as well as a refinance mortgage loan.
- On a home purchase, the home buyer needs to come up with a down payment for the home purchase
- Minimum down payment requirements differ depending on the mortgage loan program the home buyer chooses
- FHA Loans require a 3.5% down payment, Conventional Loans require either a 3% or 5% down payment on a home purchase, and USDA and VA Loans do not require any down payment
- Down payment on a home purchase is mandatory by mortgage lenders and you cannot use a sellers concession or lender’s concession towards the down payment on a home purchase
- Gift funds for a down payment are allowed on FHA Loans and Conventional Loans
We will explain how homebuyers can cover closing costs on home purchase transactions in this blog.
Lenders Allow Lender Credit And Sellers Concessions For Homebuyer’s Closing Costs
Lender Credit And Sellers Concessions are allowed on mortgage loan programs. Most homebuyers at Gustan Cho Associates do not have to worry about paying out of pocket for closing costs:
- However, Lender Credit And Sellers Concessions can only be used for closing costs and not for the down payment
- Down payment on home purchase needs to come from the home buyer and lender credit and sellers concessions cannot be used towards the down payment
- Many hardworking American families work extremely hard to save for a down payment towards a home purchase
- During these tough economic times, many people are living paycheck to paycheck
- Saving can be rather difficult
- Most homebuyers do not have to worry about closing costs
- Closing costs can be covered with seller concessions and/or a lender credit
- They just need to worry about the down payment on a home purchase
Down Payment And Closing Costs On Home Purchase
The two big costs in a home purchase are the following:
- Down Payment
- Closing Costs
The down payment is a fixed percentage of the purchase price.
- Closing costs vary depending on the city, county, state where the property is located
- It also depends on the borrower’s credit profile
- Borrowers with lower credit scores may have extra origination charges
- Borrowers with under 600 credit scores may be charged discount points as part of the lender’s loan level pricing adjustment (LLPA)
- The type of property such as condos, two to four-unit multi-family homes, and/or manufactured homes may have higher origination charges due to loan level pricing adjustments
Closing costs also vary depending on the mortgage loan program. For example, non-QM loans may have higher closing costs than government and/or closing costs.
What Are Closing Costs?
Every mortgage transaction has closing costs.
- Whether it is a home purchase or a refinance mortgage transaction, there are closing costs the mortgage borrower is liable for
- A home buyer definitely needs to come up with a down payment on a home purchase
- However, there are ways where a home buyer does not have to come up with the closing costs on a home purchase
- Closing costs need to be paid by the mortgage borrower
- On a home purchase transaction, closing costs can be paid if the home buyer gets a seller’s concession by the home seller to cover part or all of the home buyer’s closing costs
- Sellers’ concessions cannot be used towards the down payment on a home purchase
- Any seller concession overages need to go back to the home seller
- The home seller cannot give the seller concession overage to the home buyer in a form of cash or other kickback
- Homebuyers need to be careful and not ask for too much in sellers concessions
- Overages in sellers’ concessions can be used to purchase points and buy down the mortgage rates
Seller concessions can also be used to pay for the upfront FHA mortgage insurance premium instead of rolling the upfront FHA MIP into the FHA Loan balance.
Down Payment Requirement On Home Purchase
Down Payment requirements depend on the type of loan program:
- 3.5% minimum down payment is required on FHA Loans
- No down payment required on VA Loans and USDA Loans
- 3% down payment is required on conventional loans for first time home buyers
- Fannie Mae and Freddie Mac consider first time home buyers as buyers who did not have any ownership of a home in the past three years
- The down payment requirement is 5% on conventional loans for owner occupant homes
- Most home buyers have the down payment for a home purchase but not the closing costs
- Closing costs can be more than the down payment depending on the county and state the property is located
- As long as home buyers have the required down payment requirement they do not have to worry about closing costs
- Closing costs can be paid with lender credit and sellers concessions
The amount of closing costs a home seller can offer is dependent on the particular mortgage loan program.
Lender Credit Versus Mortgage Rates
The two ways where a home buyer does not have to come up with closing costs on home purchase:
- Lender Credit And Sellers Concessions
- We have covered sellers concessions on previous blogs so we will not cover it in detail
- A sellers concession is when a home seller gives a sellers credit towards closing costs to the buyer
- If there are enough sellers concessions, the home buyer does not have to pay closing costs
- If a borrower is short on sellers concessions, a lender can give a borrower lender credit
- Lenders will offer lender credit towards closing costs
- However, the borrower will get a higher interest rate on their home loan for a lender credit
- Closing costs include title charges, real estate tax stamps, transfer stamps, appraisal fees, underwriting fees, home inspection fees, attorney fees, and other costs associated with the closing of the home
- By law, the maximum sellers’ concession allowed is 6% of the purchase price of the home
- Most sellers do not mind offering a sellers concession to make the deal happen
- However, on many occasions, sellers do not want to give buyers a sellers concession
- In cases where sellers will not offer a sellers concession to the home buyer, there is another option
- Lender Credit towards closing costs
Lender credit is when a mortgage company will offer a credit towards closing costs in lieu of a higher rate.
How Does Lender Credit And Sellers Concessions Work
Lender Credit is offered by lenders. Lender Credit is when the lender can offer borrowers a certain amount in lieu of higher mortgage interest rates. Nothing is free in this world.
- Borrowers who are short on funds can get lender credit towards closing costs
- To get a lenders credit towards closing costs, borrowers need to accept a higher mortgage rate
For example, here is a case scenario:
- If the borrower got quoted a mortgage rate of 5.25% on a 30 year fixed rate mortgage loan
- And he or she does not have enough money for closing costs
- The lender can cover the closing costs with a lender credit
- But a higher mortgage rate like 5.5%
- Lenders Credit towards closing costs can only be used for covering borrower’s closing costs
- Overages in lender credit cannot go to the borrower or used for the down payment
Any overages in seller concessions need to go back to the home seller.
Examples Of Closing Costs On Home Purchase And Refinance Transactions
Examples of closing costs are the following:
- title charges
- recording charges and fees
- transfer stamps
- loan level pricing adjustments
- credit report fees
- discount points
- origination fees
- processing fees
- underwriting fees
- doc fees
- attorneys fees
- pre-paid ( escrow for two months insurance and two months of property taxes)
- one year homeowners insurance premium, flood insurance premium, appraisal fees
- other inspection fees
- any other third party costs and fees the mortgage loan borrower can be charged in the home buying process
Homebuyers who for one reason or another reason cannot get a seller concession to cover their closing costs can get a lender credit to cover their closing costs. We will discuss what a lender credit is and how lender credit works in the next paragraph.
What Is A Lender Credit To Cover Closing Costs?
A mortgage lender can offer a lender credit to the mortgage borrower to cover the mortgage borrower’s closing costs.
- Many mortgage lenders will advertise that by choosing them that the mortgage lender will cover all closing costs for borrowers
- All banks and mortgage lenders can offer a lender credit to all borrowers to cover the borrower’s closing costs
- This type of advertising is often misleading because borrowers think that by choosing the lender that offers no closing costs via an advertisement that they are getting a deal of a lifetime
You often see ads by lenders that they will pay for the home buyer’s home appraisal if you choose them and that they will pay for all of the borrower’s closing costs.
Lender Credit And Sellers Concessions: Can Lenders Help Pay Closing Costs
This is true but all lenders can offer a lender credit and the borrower can pay most or all of the closing costs with a lender credit.
- However, one thing that these lenders do not tell you is that if the lender offers you a lender credit for closing costs, the mortgage rates you will get will be much higher than the par rate that you will get if you were to pay the closing costs yourself
- Many times, a lender credit will jack up a mortgage interest rate by 0.50% percentage points where you will pay tens of thousands of dollars over the course of a 30 year fixed rate mortgage loan for just getting a few thousand dollars in a lender credit
There is no free lunch in the mortgage business and any bank or mortgage company can give you a lender credit in lieu of a higher mortgage rate.
Read more https://gustancho.com/lender-credit
Update To This Blog On Lender Credit And Sellers Concessions
This mortgage blog article post has been updated on January 19th, 2021
If you are interested in purchasing a home and have the down payment but not the closing costs, please contact me at 262-716-8151 or text us for a faster response. Or email us at [email protected] You can also visit us at Gustan Cho Associates at www.gustancho.com.