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How “No Cost Loans” and “Lender Credits” Work; No Free Lunches

How "No Cost Loans" and "Lender Credits" Work; No Free Lunches

“NO COST” Vs. “NO POINTS” REFI

We recently locked in a $775,000 refinance loan at 3.625% at “no cost.”  (Keep in mind that many factors affect a borrower’s rate, so these numbers only reflect one particular borrower.)

“No cost” means that we will use our commission or rebate to pay for all of the borrower’s nonrecurring closing costs (title, escrow, appraisal, underwriting, etc.).

At 3.625%, our total rebate/commission was about $9,000.  The non-recurring closing costs that we will pay on behalf of the borrower will be about $4,000, so we will “net” or make about $5,000 (before covering our related labor and overhead costs).

At 3.5%, the total rebate/commission was only $4,700, so there is no way we could have lowered his rate any further and offered a “no cost” loan.

Our borrower, could have instead opted for the 3.5% rate and taken a “no points” loan – where we don’t cover closing costs and we don’t charge points, but our borrower would have to pay the $4,000 of closing costs.

We recommended the “no cost” option b/c the pay-back period was too slow for the “no points” option, meaning it would take too long for the borrower to recoup his $4,000 of nonrecurring costs from interest savings.

NO COST PURCHASES ARE RARE

We rarely offer “no cost” purchases b/c the closing costs are so much higher and b/c we have no control over many of the third party fees b/c we are not choosing the vendors (escrow, inspections, etc.)

Non-recurring closing costs for a purchase can range from $5,000 to $15,000, depending on loan amount, purchase price and transfer taxes (if any).  Pre-paid items (interest, property taxes, insurance) can add an additional $3,000 to $15,000, depending on the time of year of the closing, the need for an impound account, and loan amount, among other things.

We can and often do offer credits for closing costs, but, as explained above, we have to increase the rate to do so.  FHA loans offer the most bang for the buck when it comes to lender-credits.   But, with the above Jumbo borrower, we would have to increase the rate by about 3/8% to offer an $8,000 credit.

Most of our borrowers do not want the higher rate and instead opt for “no points” purchase loans, where we charge no points or origination fees but our borrowers pay for all of the closing costs (nonrecurring and recurring).

COVERING COSTS

All lenders have substantial costs to cover with every loan, as there is far more work required behind the scenes to close a loan than individuals outside of the industry can possibly understand.   For a single purchase loan, the labor costs incurred by JVM and our mortgage banking operations can easily exceed $3,500 for pre-approval, locking, underwriting, processing, funding, close-out, shipping, etc.   For a mortgage bank with loan officers and loan officer commissions, the total labor and commission costs can be much higher, depending on the loan officer’s agreed to compensation level.

My point is that all mortgage lenders have to cover their costs when they close a loan, and they all have a minimum that they have to cover.

Hence, when lenders offer closing cost credits, “no cost loans,” or even “no underwriting fees,” they have to increase their interest rates to cover those offers – every time.

There really are no free lunches.

Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 01524255, NMLS# 310167