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Lender-Paid vs Borrower-Paid Mortgage Transactions
Need Help Comparing Mortgage Options?
Closing costs determine whether lender-paid or borrower-paid options have the better deal. Just because the rate is lower doesn’t mean it’s the better option. Gustan Cho Associates will analyze the deals and help borrowers compare loan options to determine which will actually save the most money.
Lender-Paid and Borrower-Paid Rules Borrowers Should Know
No loan selling/steering is allowed. Because of that, there are rules regarding borrower-paid and lender-paid. Borrowers should see disclosures that clearly state the loan’s costs and terms. Loan originators cannot reduce their compensation by changing the loan terms in a way that violates the rules. However, lenders, points, and borrower credits must be properly disclosed.
The importance of the Loan Estimate and the Closing Disclosure cannot be overstated. They are essential documents that summarize the details of what a borrower will ultimately be paying, what they will be credited, and the final cash to close.
Analyzing Lender-Paid vs Borrower-Paid
The easiest way to compare the two options is to request pricing for both. Items to compare include interest rates, monthly payments, total closing costs, lender credits, points, cash to close, and anything else relevant that may come up.
Also, the borrower should ask about the loan retention period. If the loan will be retained for a short period, the higher closing costs will not be worth it. However, if the closing costs are to be paid over a long period, it will be worth paying a lower interest rate.
The goal is not to select the option with the most attractive numbers. It is more about the loan structure that aligns with the borrower’s cash, payment, timing, and risk preferences.
Lender-Paid vs Borrower-Paid for FHA Loans
FHA borrowers typically focus on the cash required to close, as FHA loans entail mortgage insurance and the establishment of an escrow account. Lender-paid pricing can help reduce closing costs, but the borrower should consider the higher rate and the resulting monthly payment.
Borrower-paid pricing can be beneficial for a borrower who has the cash and wants a lower payment, which may be necessary if the debt-to-income ratio is tight.
In addition to the cash payment for loan closing, FHA borrowers should evaluate both pricing methods, as minor payment variations can affect loan approval.
Lender-Paid vs Borrower-Paid for VA Loans
Although VA borrowers may be eligible for a loan with no cash down, the loan still has closing costs. VA buyers can pay pre-closed taxes and insurance, as well as title fees, recording fees, and other costs.
Lender-paid pricing can decrease the cash required for closing. This may be especially beneficial to the borrower who wants to maintain their savings after the home purchase.
Borrower-paid pricing may be more advantageous for the VA borrower who wants a lower payment and plans to retain the loan for a long time, as well as for those considering the VA funding fee and the loan’s total cost.
Lender-Paid vs. Borrower-Paid for Conventional Loans
With Conventional loans, pricing may change based on occupancy, property type, credit score, and loan-to-value ratio. Due to risk-based pricing, lender-paid vs. borrower-paid impacts the loan rate and payment.
Borrowers with strong credit and large down payments may have more options. However, the impacts of the two different pricing structures may be considerably larger for a borrower with weaker credit and/or a smaller down payment.
For Conventional loans, Private Mortgage Insurance and other costs should be considered, since interest rates impact the total cost of the loan.
Lender-Paid vs. Borrower-Paid for Non-QM Loans
Pricing for Non-QM loans may also differ from government or Conventional loans. When borrowers use bank statement loans, DSCR loans, asset depletion loans, or other Non-QM programs, they must closely evaluate the rates and costs to determine the best option.
Lender-paid pricing can shift costs down at the expense of a higher rate, while Borrower-paid pricing can improve the rate, but increase costs.
Because Non-QM loans vary widely across lenders and programs, borrowers should request detailed pricing comparisons before deciding which to use.
Conclusion for Lender-Paid vs. Borrower-Paid Mortgage Transactions
Both lender-paid and borrower-paid mortgage transactions are completely acceptable. The better option depends on the borrower’s credit, the loan program they select, the cash to close, the payment they desire, and how long they plan to keep the loan.
Lender-paid pricing can help lower closing costs, but it comes with a trade-off: a higher interest rate. Alternatively, Borrower-paid pricing can help lower the interest rate, but closing costs will be higher.
The right answer varies from one borrower to another. A comprehensive mortgage review should detail both options and clearly articulate the short- and long-term costs for each.
Talk to a Mortgage Professional Before You Choose
Before deciding on lender-paid or borrower-paid pricing, have a mortgage professional compare the two options and detail the rate, closing costs, lender credits, points, and the resulting monthly payment. Gustan Cho Associates is dedicated to helping borrowers review their loan options and identify the loan structure that best meets their home-purchase or refinance goals.
Lender-Paid vs Borrower-Paid Mortgage Transaction FAQIs Lender-Paid Mortgage Pricing Free?
No. Lender-Paid Mortgage Pricing is not free. The Borrower may pay less at loan funding, but the price is built into the interest rate, which may result in a higher monthly payment and a higher overall interest payment if the Borrower is not planning to prepay the loan.
Why Would a Borrower Want a Higher Rate?
A Borrower may want a higher rate to achieve lower closing costs. This may make sense if a borrower is looking to preserve cash, refinance in the short term, or pay less of their own cash at closing.
Can Lender Credits Pay for Closing Costs?
Lender Credits may cover some closing costs, but may not cover all of them. Lender Credits may be affected by limits on prepaid escrow, taxes, and insurance.
Are discount points the same as borrower-paid compensation?
No, they are not the same. Discount points are a way to lower the interest rate, while borrower-paid compensation describes the payment to the mortgage broker or loan originator. While they can both be part of the closing costs, they are different.
Can a borrower shift from lender-paid to borrower-paid before closing?
This can be allowed in some situations, but it depends on the time, the disclosures, the lock terms, the lender, and compliance. Borrowers should request the change as early as possible to avoid delays, as changes can be made only within certain time frames.
Which of the two options is better for first-time homebuyers?
First-time homebuyers usually consider both options, as cash to close is a major factor. Lender-paid pricing can reduce the cash at closing, while borrower-paid pricing can reduce the loan payment. The best option depends on the buyer’s savings, payment, and how long they plan to stay in the home.
Does lender-paid pricing impact loan approval?
Lender Versus Borrower Paid Mortgage Transactions
It can impact the approval if the higher rate pushes the monthly payment and debt-to-income ratio higher. A borrower near the limit should consider both options before locking the rate.
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