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Lender Paid Closing Costs = RE Agents Commission Checks
Home/Lender Paid Closing Costs = RE Agents Commission Checks
Lender Paid Closing Costs = RE Agents Commission ChecksDaniel Dobbs2022-12-17T07:26:15-08:00
How many times have you heard prospective buyers who are “on the fence” say “We’ll just wait until we save more money”!
But if the market is rising faster than they can save $$, they’ll remain renters – possibly indefinitely.
Many prospective buyers have a down payment but are “short” dollars for closing costs, typically 2% of the loan amount,
FHA –VA- and Fannie / Freddie allow LENDERS OR SELLERS to pay a buyer’s closing costs.
If an agent wants to rebate $$ to the buyer IT HAS to be structured thru escrow and show up as a credit directly thru the seller
The credit for closing costs can not be directly “rebated” from the agent.
Let’s focus on the options for closing costs – there are 2.
2) Here’s another option to squeeze buyers into a home.
Lender Paid Closing Costs!
If the buyer has a low “debt to income ratio” (DTI) they can raise their interest rate and use a lender “rebate” to cover the closing costs up to 3% (points) of their loan amount.
Banks and so-called mortgage bankers (that’s another story) typically limit buyers to 1 – 1.5% of the loan amount for lender paid closing costs; mortgage brokers are limited to 3%.
Most buyers, initially react poorly to the proposal of a higher payment; so let’s do the math (all numbers rounded off) and are just the “P and I” (principal and interest) portion of the monthly payment.
Interest Rate vs. Lender Rebate
Scenario 1
Purchase Price $500k….$400k Loan / “30 yr. fixed“
Interest Rate of 3.5% (No Points)
Principal / Interest Payment: $1796
Lender Credit to Buyer: “Zero Dollars”
Scenario 2
Purchase Price $500.. $400k Loan / “30 year “Fixed”
Interest Rate of 4% (No Points) …
Principal / Interest Payment: $1910 ($114 higher)
Lender Credit to Buyer: $8,000*
Break Even Point = 70 months
* Rates are as of Friday, Feb 6th, 2020
In Total
Dividing the $8000 credit for closing costs …by the higher payment of $114, which puts the buyer ahead for a positive cash flow position for 6.5 years / 78 months.
Since 500k is a “starter home” (always in demand) let’s calculate a mere 3% appreciation rate over the 70 months.
The appraised value will be (compounded) to approx $145k, so with a higher rate – it’s a no brainer-AND it’s your MLO’s job to explain all options!
Another issue to keep in mind, during those “70” months, it’s (statistically) a virtual certainty the homeowner will;
A) Refi to a lower rate and/or to get cash out
B) Sell and “move up / down”
C) Have a life-changing event which includes job change / transfer or loss
D) Death of a relative (inheritance)
E) Divorce
My point is this: In a fast-changing world, 70 month is a long time!!
Why should the buyer have any “skin” in the game?
They shouldn’t!
Government Loans
If your buyer is getting an FHA-VA loan, we can “streamline refinance, their loan can be streamline refund in just a minimum of 7 months (or more when rates plunge) to lower interest rate with little or no closing costs (click on the link above) for a more in-depth explanation).
In other words your buyer can have the lender pay the $9,000 in closing costs & the buyer can then refinance back to a lower rate in just 7 months.
In Closing
The amount of lender paid closing costs a buyer can receive varies by each type of lender.
Mortgage brokers can pay up to 3% of the loan amount while banks & so called direct lenders are limited to 1.5%.
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