Fannie Mae, the organization that is responsible for helping to shape mortgage program guidelines, recently announced a new policy that enables lenders to offer closing cost assistance directly to borrowers. Fannie Mae is not a lender but its policies and regulations have a significant impact on lenders and the mortgage programs they offer directly to borrowers.
This announcement is significant because many borrowers struggle to save the funds to pay for closing costs, especially if they are focused on saving for their down payment. Although closing costs vary depending on your lender, loan amount, mortgage program and property value, they are generally 1% to 2% of your loan amount which equates to thousands of dollars for borrowers. In many cases borrowers are surprised at both the amount of closing costs as well as the items included. For example, in addition to paying numerous one-time, non-recurring costs such as lender, settlement agent, title insurance and appraisal report fees, borrowers are also required to pay a portion of ongoing, or recurring, closing costs such as partial interest expense, property tax and homeowners insurance.
Needless to say, these expenses can add up quickly and catch borrowers off guard. The last thing a prospective homeowner wants to hear is that they need to come up with thousands of dollars to close their loan and complete their property purchase. Fannie Mae’s new policy addresses this borrower challenge by enable lenders to provide closing cost assistance to borrowers.
There are several provisions to the new policy that are highly beneficial to borrowers. First, the lender closing costs assistance must be offered as grant that is not subject to repayment, so it is basically a gift from the lender. With some closing cost assistance programs, you may be required to repay part or all of the grant depending on how long you live in the property. With lender closing costs assistance, you are never required to repay the money.
It is also important to highlight that the assistance can only be used to pay closing costs and not your down payment or other transaction expenses. Additionally, the amount of the assistance cannot exceed the amount of closing costs. Finally, lenders should not increase their mortgage rate to pay for the assistance they are providing you. This is called premium pricing and borrowers should make sure that their mortgage rate remains the same whether or not they are receiving closing cost assistance.
Lender closing cost assistance provides another option for borrowers with limited financial resources. Borrowers can also apply for closing cost assistance grants with their state or local housing agencies or departments but this can be time consuming and limited funds are available. Some larger companies also offer homebuyer assistance programs to employees. Both of these programs, however, usually impose certain restrictions on participants, such as living in the home or working for the company for a certain amount of time.
Lender closing cost assistance programs are promising because they are more flexible for borrowers and easier to access because they are offered directly by the lender. While it is too soon to tell how many lenders will implement these programs, this is a positive development for both lenders and borrowers. Assisting with closing costs is another tool lenders can use to help more people qualify for mortgages and buy homes.
FREEandCLEAR will keep you abreast as lenders launch closing cost assistance programs so be sure to check back for future updates on this important topic.