November 29th, 2013 10:37 PM by Nathan Rufty
I have come across many people asking for a “no closing cost home loan” to purchase or refinance a property. The truth is, this type of loan does not exist with any lending institution. There has never been a no or zero closing cost home loan and there will likely never be one unless a bank or some private party starts to loan money for FREE, do not hold your breath on that happening.
The simple truth is every loan has closing costs and the majority of the closing costs are set and specific to 2 things, the loan amount or the purchase price. The confusion comes from the media, which intentionally led borrowers to believe such a loan exist. The government has gone to great lengths to regulate the mortgage industry over the past several years and do away with misleading statements and advertisement such as a “no closing costs” loan. Unfortunately, there are still loan originators out there using this terminology.
There are only four ways to pay for closing costs associated with a home loan and all four ways of payment come from the borrower in some form or another. The four ways closing costs are paid are: sourced funds at the time of opening an escrow (bank account(s), retirement funds, gift, etc), rolling the fees into the loan (increasing the loan amount), a lender credit that is applied to the cost (borrower must take a higher interest rate) and the last way is for the seller to give a credit at the time of closing which can result in a higher sells price. These are the four options available to any borrower no matter the type, size or classification of loan.
There are always cost to close a loan, just how will those cost be paid. From the 4 options above and there are 4 areas of loan fees that will be charged. You will have lender fees, title fees, escrow fees and borrower fees; such as daily interest, home inspection, termite, insurance paid for one year upfront and an impound account. As you can see there is no way to offer a free home loan without brining in one or more of the 4 ways to pay for closing costs.
The terminology “No Closing Costs, No Origination, No Fee Loans” stemmed from rebate pricing with a loan. This allows a lender to give the borrower (borrower also agreeing to the rate) a higher interest rate in order to obtain a credit to cover the costs of the loan that is built into that higher rate spread over the term of the loan.
Nothing is free in our business, it is how we present the cost of a home loan in a honest and professional manner to our consumer that will assist them to make the best choice based on their current finances. That is how I work with my clients, to be honest upfront so there are no surprises at the closing table and ensure we maximize every dollar that we can.
Purchasing a home should be a fun and exciting experience, not a stressfully one that leaves a buyer wondering what they got themselves into. You need to work with a professional that properly licensed that has a proven track record of closing purchase and refinance transactions with many available home loan programs. I welcome the opportunity to be that direct home loan lender to assist with your next purchase or refinance, contact me direct at 909-503-5600.