This blog will discuss lender credit and sellers concessions for closing costs. There are fees and costs involved in a home purchase mortgage loan and 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. In the following paragraphs, we will cover how lender credit and sellers concessions for closing costs work.
What Are The Down Payment Requirements on Home Loans?
FHA loans require a 3.5% down payment for homebuyers at least a 10% down payment. HUD, the parent of FHA loans, allows borrowers under 580 credit scores and down to 500 FICO to qualify for an FHA loan with a 10% 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. Non-QM and alternative mortgage loan programs require a 10% to 30% down payment.
What Is The Difference Between Down Payment Versus Closing Costs on a Home Purchase?
A down payment on a home purchase is mandatory by mortgage lenders. Homebuyers 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 and Conventional loans. This blog will explain how homebuyers can cover closing costs on home purchase transactions.
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. Lender credit and sellers concessions can only be used for closing costs and not for the down payment. The down payment on a home purchase needs to come from the buyer. Lender credit, and sellers concessions cannot be used toward the down payment.
How Does The Down Payment and Closing Costs Work For a Home Purchase?
Many hardworking American families work extremely hard to save for a down payment toward 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 lender credit. They need to worry about the down payment on a home purchase.
Down Payment and Closing Costs on Home Purchase
The two types of costs in a home purchase are the following:
- Down Payment
- Closing Costs
Who Pays For Closing Costs on a Real Estate Transaction?
The down payment is a fixed percentage of the purchase price. Closing costs vary depending on the city, county, and 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 under 600 credit scores may be charged discount points for the lender’s loan level pricing adjustment (LLPA).
The type of property, such as condos, two to four-unit multi-family homes, and 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 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. John Strange, a senior loan officer at Gustan Cho Associates, explains the difference between the down payment and closing costs and what you can use seller concessions to cover costs in a home purchase as follows:
A homebuyer must come up with a down payment on a home purchase. 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. In 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.
What Happens To Overages in Seller Concessions?
The home seller cannot give the seller concession overage to the homebuyer in the form of cash or other kickback. Homebuyers must be careful and not ask for too much in seller concessions. Overage in sellers’ concessions can be used to purchase points and decrease mortgage rates. Seller concessions can also be used to pay 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. A 3.5% minimum down payment is required on FHA loans. No down payment is required on VA and USDA loans. For first-time home buyers, a 3% down payment is required on conventional loans. Fannie Mae and Freddie Mac consider first-time home buyers as buyers who have not owned a home in the past three years.
Down Payment Requirements on Conventional Loans
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 in which the property is located.
As long as home buyers have the required down payment, they do not have to worry about closing costs. Closing costs can be paid with lender credit and seller concessions. The closing costs a home seller can offer to depend on the mortgage loan program.
Lender Credit Versus Mortgage Rates
The two ways are that a home buyer does not have to come up with closing costs on a home purchase—lender credit and seller concessions. We have covered seller concessions in previous blogs, so we will not cover them in detail.
How Do Seller Concessions From Home Sellers Work? A seller concession is when a home seller gives a seller credit toward closing costs to the buyer. With enough seller concessions, the home buyer does not have to pay closing costs. If a borrower is short on seller concessions, a lender can give a borrower lender credit. Lenders will offer lender credit toward closing costs. However, the borrower will get a higher interest rate on their home loan for a lender’s credit.
How Do Appraisers Adjust Seller Concessions?
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 home’s closing.
By law, the maximum sellers’ concession allowed is 6% of the home’s purchase price. Most sellers do not mind offering a seller concession to make the deal happen. However, on many occasions, sellers do not want to give buyers a seller concession.
There is another option where sellers will not offer a seller concession to the home buyer—lender credit towards closing costs. Lender credit is when a mortgage company offers credit towards closing costs in place of a higher rate.
How Do Lender Credit and Sellers Concessions Work For Closing Costs?
Lenders offer Lender credit. Lender credit is when the lender can offer borrowers a certain amount instead of higher mortgage interest rates. Nothing is free in this world. Borrowers who are short on funds can get lender credit toward closing costs. To get a lender credit towards closing costs, borrowers must 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%
- Lender credit towards closing costs can only cover the borrower’s closing costs.
Overages in lender credit cannot go to the borrower or be used for the down payment. Any overages in seller concessions must 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
- 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 of insurance and two months of property taxes)
- one-year homeowners insurance premium, flood insurance premium, appraisal fees
- other inspection fees
Closing costs include third-party costs and fees the mortgage loan borrower can charge in home-buying. Homebuyers who cannot get a seller concession to cover their closing costs for one reason or another can get a lender credit to cover their closing costs. We will discuss what 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. The mortgage lender will cover all closing costs for borrowers.
All banks and mortgage lenders can offer lender credit to all borrowers to cover the borrower’s closing costs. However. lender credit is offered by lenders for a higher mortgage rate.
This type of advertising is often misleading because borrowers think they are getting a lifetime deal by choosing the lender that offers no closing costs via an advertisement. 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 closing costs with a lender credit. However, these lenders do not tell you 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 you will get if you pay the closing costs yourself.
Often, a lender credit will jack up a mortgage interest rate by 0.50% percentage points, where you will pay tens of thousands of dollars throughout 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; any bank or mortgage company can give you a lender credit instead of a higher mortgage rate.
Update To This Blog On Lender Credit and Sellers Concessions: This mortgage blog article post was updated on July 11th, 2023. If you want to purchase a home and have the down payment but not the closing costs, please contact me at 800-900-8569 or text us for a faster response. Or email us at firstname.lastname@example.org. You can also visit us at Gustan Cho Associates at www.gustancho.com.