Lender paid closing costs

"new" iconHere's some good news. Fannie Mae (Federal National Mortgage Association) now permits lenders to "gift" closing cost assistance to home buyers obtaining a conventional home loan.

"The lender may provide the borrower with a contribution to fund borrower-paid closing costs and prepaid fees . . . the amount of the lender contribution should not exceed the amount of borrower-paid closing costs and prepaid fees, and may not be used to fund any portion of the down payment or financial reserve requirements. " SOURCE: Fannie Mae B3-4.3-06: Donations From Entities (05/01/2018)

Mortgage broker ith loan applicantsThe new guidelines allow lenders to use "premium pricing" to cover the closing cost and prepaid assistance funding. Premium pricing means the lender will offer a higher interest rate in exchange for the closing cost subsidy.

Prior to this announcement, lenders were permitted to "assist" borrowers with a lender's credit. The lender assist was based on the down payment percentage. Here is the lender assistance percentages:

Occupancy TypeDown PaymentMaximum Lender Assistance
Principal residence or second home5 - 9%3%
 10% - 24%6%
 25% and greater9%
Investment propertyall down payment amounts2%

Are lender fees and closing costs the same?

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.

Are lender fees considered points?

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.

Do I need a mortgage broker?

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.

How to choose a mortgage broker?

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.

How do mortgage brokers get paid?

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 rate that is 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.

Questions to ask a mortgage broker:

"What loan program is best for me"?
"What is the interest rate?"
"What is the lock in period?"
"What happens if you cannot complete the mortgage application within the lock in period"?

Should I use a mortgage broker?

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.

What does a mortgage broker do?

The mortgage broker is the middleman between the borrower and 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 lender for their consideration . . . hopefully, approval.