A borrower with substantial funds recently requested an $8,000 lender credit from us to cover his closing costs.
In order to give him the large credit, we had to increase his rate substantially.
Knowing all this, we asked the borrower why he wanted the large credit and he told us it was because he had a short-term time horizon.
We funded his loan and gave him his credit, and then of course recouped that credit and our commission by selling the loan on the secondary market to an investor.
Unfortunately for us, a big bank pushed our borrower to refinance out of our loan immediately after we closed.
If our borrower had gone through with the refinance, we (not our borrower) would have had to pay an $18,000 Early Pay Off Penalty.
This is because all mortgage banks have agreements with their investors that state that loans purchased by investors cannot pay off for six months.
If they do pay off within six months, the investors can recoup all of the “yield premiums” paid to the mortgage bank.
The six month “early pay off” rule is in place so lenders and investors can recoup some of their expenses incurred (mostly yield premiums/commissions) when they funded or bought the loan.
In yesterday’s blog, I talked about how borrowers do not have prepayment penalties. And they don’t.
BUT – lenders themselves are subject to “Early Payoff Penalties” and they can be substantial – in excess of $20,000 in many cases (often far exceeding any profits we made on the loan).
This is why we get commitments from our borrowers to not refinance for six months, and it is also why our team is very careful not to refinance borrowers out of other mortgage banks’ loans if they closed less than six months ago.
If rates do fall after we close and borrowers want to refinance, we can lock them into a new refinance loan as soon as four months after the close with a 60-day lock; we just can’t fund the new loan until six months after close.
In any case, we like to make sure that all of our borrowers and agent-partners understand how Early Pay Off Penalties work, and … six months is all we ask :).
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167