Most lenders would like you to think there is no such thing as a VA loan with no closing costs. This couldn’t be further from the truth. Let’s be clear about this though. There are costs involved with every type of mortgage. These costs however, do not have to get passed on to the veteran and in fact, there are lenders that are not only willing to waive their own fees but have lower profit minimums and thus can pass on more savings in the form of lender credits to the veteran.
What are Lender Credits?
Whether it be the actual servicing of a loan or the note the loan is written on, every type of mortgage gets sold on the secondary market. This is how all lenders make the majority, if not all of their profits. In the case where this is the primary source of revenue for the lender, there is a profit margin that the lender must report to the federal government. This was enacted as part of the Frank-Dodd act in 2010 to help regulate lenders and originators and thus stop predatory lending practices.
When the servicing and/or note is sold, the lender receives a sizable payout on each loan. The payout is determined by several factors, including the quality of the borrower’s credit as well as type of loan, interest rate and LTV (Loan to Value). Lenders generally know what this payout is going to be even before the loan is originated. Knowing this allows the lender to determine how much money will be left over after its reported profits are taken, expenses paid as well as any commission payouts to the Loan Originator.
What is left over is additional profits. These profits, or overages, can either go back to the bank as additional revenue or the Loan Originator can use it to help the customer by paying additional costs. This is called a “Lender Credit”.
Do No closing costs loans have higher rates?
This cannot be answered definitively because all of the factors that are involved. The size of the loan can have an affect on profit margins due to the fact that it is exponentially more difficult to meet the exact same profit minimums as the loan amount decreases. Additionally, certain states have much more costly state fees. However, VA loans on the other hand have extremely high pay outs, even on the lower rates.
More often than not, you can actually get a lower rate on a VA loan when compared to a conventional loan and still have zero fees due to the thousands of dollars available as lender credits.
So don’t let lenders tell you that there is no such thing as a “no cost VA loan” or that rates must be higher. That only means that particular lender cannot offer one to you and they definitely don’t want you to look around to find out for yourself.
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