Borrowers often send us refinance proposals from other lenders to review so we can either beat the proposal or give our blessing.
One of the things that always scares us the most is this phrase: “there will be no out of pocket costs…”
This often means the loan officer is charging outrageous fees and just increasing the loan amount to cover them all.
So yes, the borrower will not have to bring in any “cash to close” but if her loan amount is increasing by $10,000, her refinance may not be a good idea in the first place.
CASH TO CLOSE – TWO KINDS OF CLOSING COSTS
This is not to say that borrowers should be upset every time their loan amount is increased to cover cash to close.
I am only saying that loan officers need to be very transparent and not tout “no out of pocket” in a misleading manner.
There are two kinds of closing costs, as most people know: (1) non-recurring or “one-time” fees like title insurance, escrow, appraisal, etc.; and (2) recurring costs like property taxes, insurance, and interest.
With almost all of our refinance loans, we offer to pay all of the non-recurring costs on behalf of our borrower.
But, even when we cover the non-recurring costs, the recurring closing costs can still be substantial – particularly if a borrower is establishing a new impound/escrow account.
In these situations, borrowers will sometimes ask us to increase their loan amount to help cover recurring closing costs.
But the key distinction here is that we are not increasing the loan amount so we can get away with higher fees/higher non-recurring closing costs.
Lenders need to take great care to explain closing costs, cash to close and all of the options for covering them to every borrower.
The options include: (1) increasing the loan amount; (2) just writing a check; and (3) increasing the interest rate and the “yield premium”/commission so the lender can cover more costs.
WORST ADVICE EVER
B/c purchase transactions involve so many moving parts and so many parties, lots of things can go wrong.
When things do go wrong, however, the worst thing that can happen is for buyers or sellers to “lawyer up” right away.
I have seen this happen numerous times over the years, and all it does is bring transactions to a screeching halt.
This is b/c attorneys for lenders, brokerages and title companies have quite literally “seen it all.”
They are not the least bit intimidated by threats and they often just advise their clients to put a halt to everything – delaying escrows.
If things really get sticky the property itself can get tied up in litigation for months or even years – preventing everyone from getting paid.
Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167
