Written By: Joel Palmer, Op-Ed Writer
In a move that could help mortgage processors and underwriters assist more first-time homebuyers, Fannie Mae is allowing lenders to fund closing cost and prepaid fees.
Fannie released its latest Selling Guide update earlier this month, clarifying that lender-sourced contributions to fund closing costs and prepaid fees that are normally the responsibility of the borrower are permitted under certain circumstances.
The change is effective immediately.
Fannie said the change will allow lenders greater flexibility to provide closing cost assistance to borrowers, thus“making it easier for borrowers to purchase a home.”
Lenderscan provide a contribution to fund borrower-paid closing costs and prepaid fees if:
• The lender credit is derived from premium pricing, which refers to situations when a borrower selects a higher interest rate on a mortgage loan in exchange for a lender credit.
• The lender credit is sourced directly from lender funds with no expectation for repayment or financial obligation.
• The lender contribution is not used toward the mortgage downpayment, only for closing costs and fees.
• The funds provided by the lender are not derived from a third party.
In addition, the gift cannot exceed the amount of the borrower closing costs. “Otherwise,” according to the Selling Guide,“the amount of the contribution is not limited except when the lender is an interested party to a purchase transaction…Any excess lender credit required to be returned to the borrower in accordance with applicable regulatory requirements is considered an overpayment of fees and charges, and may be applied as a principal curtailment or returned in cash to the borrower.”
The move by Fannie Mae comes at a time when buyers, especially first-time homeowners, can use all the help they can get to get through the mortgage processing and underwriting process.
Both rising home prices and increasing mortgage rates are making it more expensive for first-time buyers to enter the market. Since first-time buyers don’t have proceeds from a home sale to help with a new mortgage, their underwriting approval often hinges on how much cash they can bring to the table.
It’s not just young people who are being turned off by homeownership. Freddie Mac research shows that growing segments of the population including baby boomers and Generation X are showing less interest in owning a home.
“Perceptions of affordability and cost continue to play an outsized role in the choices of America’s renters, as they overwhelmingly see renting as more affordable and the right choice for them – right now,” said David Brickman, executive vice president and head of Freddie Mac Multifamily.
Buyers are also dealing with an environment in which demand is far greater than the supply of homes. Because it’s a seller’s market, most buyers can’t count on sellers paying the buyer’s closing costs during negotiations.
According to a survey last year by Bankrate, the average closing costs in the U.S. on a $200,000 mortgage was $2,084, based on a hypothetical buyer of a single-family house, using a 20 percent down payment, with excellent credit. Furthermore, the hypothetical house was previously owned, and the buyer is not a first-time homeowner.
With the ability to contribute to their clients’ closing costs, mortgage processors and underwriters can help more prospective buyers overcome a lack of upfront cash.
About the Author
As an NAMP® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.