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How Does Borrower Paid Compensation on VA Loans Work?
How does borrower paid compensation on VA loans work? Why is the borrower paid compensation limited to 1% and cannot be somewhere in between 2.75% and 1.0%?
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When it comes to VA loans, borrower-paid compensation works a bit differently compared to other mortgage types. Here’s an overview of how it typically operates:
- VA Rules on Lender Fees The VA has strict limits on the fees that lenders can charge borrowers for VA loans. These fee caps are designed to protect veterans from excessive costs.
- Non-Allowable Fees Lenders are prohibited from charging borrowers certain fees, such as:
- Origination fees
- Processing fees
- Underwriting fees
- Most other lender fees
This restriction essentially eliminates traditional borrower-paid compensation models where the borrower directly pays the loan officer’s commission or origination fees.
- Allowable Fees The VA does allow lenders to charge a flat 1% origination fee to the borrower. This 1% fee can be used to compensate the loan officer/originator, but this amount is capped and cannot exceed the 1% limit set by the VA.
- Lender-Paid Compensation Since lenders cannot charge most origination-related fees, the common approach is for lenders to pay loan officers/originators through lender-paid compensation.
This means that the lender essentially builds the cost of compensating the loan officer into the overall pricing and rates offered to the borrower.
- Pricing Adjustments Lenders may offer different rate and pricing options to the borrower, with varying lender credits or adjustments. These pricing adjustments can be used to provide compensation to the loan officer while still adhering to the VA’s fee limits.
While borrowers do not directly pay the loan officer’s compensation on a VA loan, it is factored into the overall costs and rates offered by the lender. Borrowers should carefully review the pricing options and associated fees to understand the true costs of their VA loan.
It’s important to note that the VA’s fee restrictions and lender-paid compensation model for VA loans are designed to protect veterans and make these loans as affordable as possible. Transparency and clear communication from lenders about their compensation practices are crucial for borrowers when obtaining a VA loan.