Month: July 2018

Prior to 2008 there was a mortgage lender on almost every corner. The barrier to entry for loan officers was very low and the income potential was very high. That in itself was a recipe for disaster.  There were literally individuals getting into the mortgage industry with minimal experience in any type of work much less lending and making well over 6 figures in their first year. There was just as many lending products as there was lenders. Fast forward 10 years and the lending landscape has done a 180.

In today’s lending world compliance takes center stage and getting into the lending business as a loan officer takes a lot of work. As far as loan products go there is essentially four: Conventional, USDA, VA, and FHA.  The government backed loans are extremely popular due to the flexible in the underwriting guidelines and low down payment features. These programs are self-funded by the collection of upfront and monthly fees.

FHA has a monthly premium that borrower’s pay each month as well as an up-front funding fee. The monthly fee is actually called MIP (Mortgage Insurance Premium). USDA also has a monthly fee paid by the borrower as well as an upfront fee. USDA however calls their upfront fee a Guarantee Fee and their monthly fee an Annual Premium. The idea for both loan types is the same in that these fees are collected so the programs can sustain themselves. The agencies at times will raise or lower the fees based on the amount of money that is each fund.  The USDA fee that is paid monthly can be a little confusing for some because it is called an annual fee but it is collected monthly. Both FHA and USDA use a factor for their fees. The FHA factor for their monthly MIP is currently .85%. In theory a customer who borrows $100,000 by using a FHA loan will pay roughly $85 per month for their MIP. USDA currently uses .35% for their annual premium. The math is as straight forward as the FHA loan. The same $100,000 loan using a USDA Loan would be around d $29 per month. The math works out as follows: $100,000 x .35% divided by 12 months.

While the fees are calculated differently and called something different they both serve the same purpose which is to fund their programs. Without these fees these two widely popular programs may not exist at all or at least be drastically different from what they are today. Today’s mortgage industry is very dependent on government backed lending and many home buyers benefit from these great programs.

The mortgage loan process is notorious for using words and acronyms that are somewhat foreign to someone who has never purchased a home or worked in the lending business. It’s not uncommon to hear someone rattle off things little LTV (loan to value) or DPA (down payment assistance) and maybe even CLTV (combined loan to value). The list goes on and on but the point here is that the lending process almost has its own language. Depending on the loan type you may hear different things or a combination of things that seem new to you. One term that comes up in most all loan scenarios is Seller Concession.

Seller Concessions can easily be explained as the amount of closing costs the seller will pay for the buyer. The loan product and sometimes loan to value will determine the amount the seller can pay. The programs will allow a total not to exceed a certain percentage of the sales price. The lender however will want to see that amount converted to a dollar amount. So for example the conventional loan allows 3% seller concessions when the LTV is above 90% and will go to 6% when its 90% LTV or below. In this scenario if the sales price was $100,000 and the LTV was 95% then the max the seller could pay for the borrower in closing costs is $3,000. The government insured loans such as FHA, VA and USDA are much more aggressive.  The USDA Loan for example allows 6% seller concessions. From the previous scenario the seller can pay up to $6,000 of the buyers closing costs on that same loan of $100,000. This is one of the many reason there has been a significant rise of government insured loans over the last 10 years. The government backed loans allow borrowers to get into homes with little to no money out of pocket.

The million dollar question is usually, “Why would a seller pay the closing costs in the first place?” The logic is pretty simple. Many borrowers today have minimal savings and if they are having to put money into the transaction for down payment it usually doesn’t leave much for the closing costs so without this feature there would be a lot less buyers for the sellers to sell their homes to. The theory is that the sellers price this into their negotiations so they are not really taking much if any a hit on the transaction.  Seller concessions are a very important part of today’s home loan process.