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“1% Closing Cost Credit Referral” How’s It Work? Compliant? No Free Lunch

Couple sits with realtor reviewing documents in living roomOne of America’s largest mortgage banks is offering a “1% closing cost credit referral” to real estate agents.

The below paragraph was copied directly from an email that the lender sent to an agent we know:

“I’ve attached your exclusive 1% closing cost credit referral. In order to reserve that for your new buyers you refer to me & my VIP TEAM I manage, I have to set up a specialty profile for the client to receive this discount just make sure you send me their name, phone number and email address. Then I can send them an email with you CC on it and call with your permission.”

The lender is doing nothing wrong (to be clear), as this is probably good marketing and it is no doubt compliant (no lender of that size would ever risk a major compliance breach).

I merely want to discuss the 1% credit for educational purposes.

COMPLIANCE

The 1% credit is compliant with RESPA and other regulations b/c the credit is going entirely to the borrower and NOT to the Realtor/agent.

The credit still benefits the referring agent b/c the agent has something very concrete to offer to her clients (making it more likely the clients will allow her to represent them with their purchase).

But, not a penny is going directly to the agent in exchange for the agent referring a client to the lender (which is what RESPA forbids).

NO FREE LUNCH

Here is the primary point of this blog and a reminder I share often – there are no free lunches in the mortgage world.

Any lender can offer a 1% credit to borrowers, but such credits always come with a higher rate.

Hence, the above referenced lender either has higher rates already (which allow them to affordably offer the credit) or they will have to increase their rates by 1/4 to 1/2 percent (depending on market conditions) to pay for the credit.

As a reminder, mortgage banks get paid by selling their loans on the secondary market at a “premium.” And the higher the rate, the more “premium” they earn.

Lastly – right now, based on current market conditions, it often makes sense to take a slightly higher rate in exchange for a closing cost credit.

I will discuss this further in my next blog.

Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167