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Will Lenders Pay Closing Costs?

Mortgage broker ith loan applicantsLenders 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:

lender-paid-closing-cost-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:

Sales Price$250,000 $250,000
Loan Amount$200,000 $200,000
Term30 Years30 Years
Interest rate2.50%3.50%
Points$722.00-$6,326.00
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.

FHA loan

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:

Premium pricing refers to the aggregate credits from a Mortgagee or Third Party Originator (TPO) at the interest rate chosen. Premium pricing may be used to pay a Borrower’s actual closing costs and prepaid items. Premium Pricing is not included as part of the Interested Party limitation unless the Mortgagee or TPO is the property seller, real estate agent, builder or developer.

The funds derived from a premium priced mortgage:
  • must be disclosed in accordance with the Real Estate Settlement Procedures Act (RESPA);
  • must be used to reduce the principal balance if the credit amount exceeds the actual dollar amount for closing costs and prepaid items; and
  • may not be used for payment of debts, collection accounts, escrow shortages or missed Mortgage Payments, or Judgments.

Conventional loan

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).


USDA loan

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.

Rotating question markFrequently 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 seller credit exceed closing costs?
A. It happens every day. The real estate agent or the lender over estimates the seller paid costs and the seller gets to keep the excess credit.

Q. Can seller paid closing costs cover prepaids?
A. Yes

Q. Can sellers pay all closing costs?
A. The seller paid closing costs are limited the home 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 the down payment or closing costs.

Q. Do closing costs have to be paid upfront?
A. Yep

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 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 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?
A. Yes

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.