# Where Does the Lender Credit Come From?

On your mortgage estimate, you might see a credit for several thousand dollars to be used toward closing costs. I’ve been asked, “Is this legit? Is this real? Where does that money come from?”

To answer, when a lender gives you an interest rate higher than par rate, there is an extra profit, or extra cash that can be given to you as a credit. Par rate is the base rate that does not yield extra profit to the lender nor require money (charged in percentage points) to buy it down. Par rate changes daily.

A perfect example is a set of two mortgage estimates I reviewed yesterday for one of my coaching clients. The lender had given him these choices for a 30-year fixed rate, 10 percent down payment, top tier credit:

Choice #1

3.375% with a cost of 0.4 percentage points. For his loan amount of \$405,000, that was a cost of \$1,701.

Choice #2

3.75% with a lender credit of \$8,059. That would give him over eight grand to pay his closing costs. The lender had that much money to give, because 3.75% was over the par rate of 3.4% (on that day).

Which is Better?

The difference between these two loan offers is \$9,760. (A cost of \$1,701 versus a credit of \$8,059.) Talk about going from one extreme to another!

First, I do not recommend paying \$1,701 to get an interest rate one eighth of one percent (0.125%) lower than par rate. For his loan amount, it would take five years just to break even on that cost. That is too long, in my opinion. Also, he happened to be tight on money for closing costs after he made the 10 percent down payment, so why would he spend so much extra to buy down his rate? Better to keep that money in an emergency account.

I recommended asking for 3.5% with zero cost.  This is because 3.5% is the closest rate to par rate for the day (yesterday). Depending on the day he locks in, there may or may not be a small credit, depending on exact par rate.

However, if he found that his dream house — the one he and his wife fell totally in love with and absolutely had to have — took all of his cash for the down payment, leaving him without enough left for closing costs, then taking the higher interest rate (and higher monthly payment) so that he’d get the big lender credit to cover closing costs was a viable option.

Personally, I would rather see him take 3.5% par rate on a more affordable house with a lower monthly payment.

But for a person with a low debt ratio and high income, the higher interest rate is not a turn-off, and the lender credit is an advantage one might choose to take.

By the way, if you read Mortgage Rip-Offs and Money Savers, you know this lender credit is the Yield Spread Premium (YSP). Per new lending laws, if a lender is charging an origination fee (including processing fee, underwriting fee, administration fee, application fee), then any YSP they receive must be given to the borrower as a credit. However, if the lender is a bank or a direct lender using their own money to fund the loan, they do not have to reveal or credit you any extra profit they make. And don’t bother asking, because they will never tell you what their overage/profit is. Most will deny it altogether, because as a bank or direct lender, they don’t call it YSP; they call it SRP (Service Release Premium).

If you have any questions about lender credit, please feel free to ask. And once again, thank you for stopping by to read my blog.

# Legitimate Ad or Marketing Ploy?

I was listening to my radio when on came yet another ad by a local mortgage company. Maybe you’ve heard a similar ad and wondered if it was a great company to get a loan from. Or maybe you’re a real estate agent and wondered if this company could get your buyers good financing.

In this ad, the owner of the mortgage company was telling listeners about his fantastic, historically low interest rates and APRs (Annual Percentage Rates). Fine, no problem. But then he capped off the ad by saying, “With us, you never pay an upfront fee!” Like it some kind of unique, special deal: no up front fee.

THE TRUTH: Federal banking law forbids any mortgage lender–including banks, direct lenders, credit unions, or brokers–from collecting any money up front, unless you want them to pull your credit report; and in that case, they can ask for payment for the credit report only (which is normally less than \$30).

It is illegal to ask you to pay a few hundred dollars, for any amount whatsoever, for an application fee, processing fee, acceptance fee, or any other type of fee. Other than paying for the credit report, a lender must not ask for any money without first providing you with a Good Faith Estimate.

If you already know your credit score or know that you have excellent credit with at least three accounts on record, then there is no need to have your credit report pulled before you are ready to commit to that lender. If you are shopping for a good loan, do not disclose your social security number or let the loan officer pull your credit.

Ask the loan officer for a Cost Estimate or a Fees Worksheet. It doesn’t matter what they call it, the up front estimate does not require a credit report pull. Before 2010, it was the Good Faith Estimate that was given up front; now it is the Cost Estimate. It’s the same thing, different title at the top of the page. Due to (insipid) federal regulations, lenders were forced to change the title of the upfront estimate. You have the right to receive this without cost, obligation, or credit pull.

The radio ad I heard, the one bragging about “we have no upfront fee” was on Christian radio. So listener beware: just because an ad is on your favorite station, it doesn’t make it 100 percent honest. No upfront fee is the law. Touting it as unique to your company is a marketing ploy. So if you don’t like shady ploys, ignore those ads.

# Best and Worst New Mortgage Laws

2012 gave us plenty of time to see how the new mortgage laws have played out, both for home buyers and home owners refinancing. Here are my votes for the best and the worst new laws.

THE BEST NEW LENDING LAW

It seems the Feds took a tip straight out of my book, Mortgage Rip-Offs and Money Savers, by passing a law that states the lender’s fees cannot increase after they give you a Good Faith Estimate (GFE) and you accept it within ten days. This has eliminated surprise fees from popping up at the time of closing–a common occurrence I warned people about. No more bait-and-switch! No more finding a new \$500 fee at closing! This is a law we needed, and it has saved borrowers hundreds of dollars.

THE WORST NEW LENDING LAW

It’s hard to pick just one, but the law that says the convoluted 3-page GFE designed by the Feds is a contractually binding document is just plain stupid. And I don’t use that word very often. Since when is an estimate a contract? Because of this law, it is impossible for a loan officer to provide a GFE up front. How could anyone offer a loan contract without verifying credit, income, and assets? This law has forced all lenders to rename the upfront GFE to something different.

The form used most often as a GFE before (a great form that was the favorite of most mortgage brokers and my personal favorite) is now titled “Initial Fees Worksheet.” Banks have their own forms with titles such as “Cost Estimate Worksheet” and “Cost Analysis.”

The result has been nothing but confusion. No benefit, no help, no transparency, only confusion.

Let’s hope 2013 brings more common sense, more savings, and more clarity back into federally-required mortgage documents.

Thank you for reading and recommending my books: Mortgage Rip-offs and Money Savers, and Homebuyers Beware. Thank you to all the good folks who emailed to let me know how much money they saved because of this information. It’s for you that I write!

Happy New Year!

# Worried Your Loan Won’t Close on Time?

I received a question from a home owner who is refinancing. In the past, he went through a nightmare with his loan closing late, and he doesn’t want that to happen again.

He wrote: “My loan officer knows my concern and he keep ‘verbally’ saying it will be completed in 45 days – I just have had experience that it always goes longer and just wondering if there are anything I can get from him that would have more teeth and more motivation for him to ensure it does close in 45 days – i.e. without me babysitting, getting frantic and calling everyone every other day because 45 days is next week (you know how that goes… and I don’t want to go through that again with any loan ever – and just have it leisurely close on its own in 45 days would be refreshing.”

There is only so much any of us can control… you, me, the loan officer. There are multiple things that can go wrong in the middle of the loan process that can cause a delay, so the best thing you can do is to make sure you’re doing everything in YOUR power to prevent that. For example, get all the required documentation to the loan officer on the same day he asks for it. Expect to receive requests for letters of explanation from the underwriter in the middle of the process, and get those letters done and submitted the same day. (These letters need to be only two to four sentences, so they are truly quickies. Ask your loan officer for help writing them, if needed.)

Don’t be a pest, because nobody likes to be micro-managed. It’s insulting and off-putting. Expect an update weekly. Feel free to email or call for the weekly update if it doesn’t come automatically. There will not be news available on your loan on a daily basis.

Since this is a refinance, you don’t have a real estate agent that will be in contact the loan officer, so that is one disadvantage for you. Also, underwriters favor purchase loans over refinances when it comes to deadlines, because purchase loans are contractually obligated to close by a certain date, and people have to move out of homes, etc. With a refinance, it’s not an emergency if your loan closes one day late: that is the attitude of the underwriters, so your loan officer has that challenge.

Nevertheless, your loan officer does have a personally vested interest in getting your loan closed asap. Unlike the underwriters, your loan officer is not on salary and gets paid only if and when your loan closes. So he is truly on your side. And this brings up a possibility…

Loan officers work on commission, or you might say, for rewards. You could offer your loan officer a reward for closing on time. You’ve heard the saying that honey is more effective than vinegar? If it’s truly important to you to get your loan closed by day 45, then you might email your loan officer that you are trusting him and that when your loan closes on time, you promise to write him a glowing thank you letter that will include a gift card to Amazon.

Notice how I phrased that to be polite and respectful, not insulting.

One last thing. There are events that occur that none of us can control. If the appraiser drops dead before he completes the appraisal report, if there is an earthquake, if war breaks out, your loan might be delayed. This is why there is no such thing as a guarantee that anyone’s loan will close on time. Good luck, and let me know how it goes.