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Here are several ways to reduce the closing costs associated with your sub-prime mortgage.
1) Finance origination and broker fees into your interest rate.
There is a lot of work involved in setting up the ideal financing for a borrower, as no two transactions are identical. Brokers specializing in the sub-prime market typically spend 3 to 5 times on their more difficult loans than those brokers that deal with strictly “A paper” borrowers. That said, the fees and commissions tend to be higher with non-prime loans. Paying two points on a $200,000 is equal to $4,000. Ask your lender or broker to incorporate those points into the interest rate (his/her yield spread premium) and although your interest rate will probably rise about 1.25%, that extra $4,000 can make a big difference in savings on your closing costs.
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2) See what closing costs the lender is willing to pay.
Some lenders will give you the option to pay their “commitment fees” or other charges in exchange for a pre-payment penalty or rate increase. Some non-prime lenders fees can run almost double those of conforming lenders because of the extra processing work involved and may reach close to $1,000. See what options are available to you.
3) Don’t escrow taxes or insurance.
This may seem a bit risky when your yearly tax bill arrives, but most non-prime lenders do not require you to escrow your taxes or insurance. This option is typically available to prime borrowers too, but at a price. Depending on the time of year your loan closes and when the property and city or county taxes are due, this may save you thousands of dollars at closing.
4) Close towards the end of the month.
Let’s say that you have a loan scheduled to close on May 15th, 2007. Your first mortgage payment will be due on July 1st. Lenders basically consider the mortgage to begin on the first day of the month before your first payment is due (June 1st). However, they are lending you money before June 1st and will charge you per day (or “per diem”) between the day the loan funds and the first of the following month (June 1st). That means you will need to pay simple interest on the total amount of the loan for 17 days. Three weeks of per diem interest can cost over $1,100 on a $255,000 loan. If for some reason, your loan is delayed at the last minute and you end up closing at the beginning of the following month, many lenders will offer you a per diem interest rebate, provided you still make your first payment on July 1st.
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The following apply to purchase transactions
4) Maximize the seller concession
Seller concession or “seller help” refers to the practice of having the seller contribute money towards your closing costs. Negotiate this with your seller or have your broker or realtor work it out with them. Typically, sellers are willing to offer some assistance towards closing costs and if they think that you gave them a low-ball offer, agree to raise the sales price to cover the closing costs. There are two things to remember about this, however. You need to make sure that the property will appraise for what you’re offering (the lender will lend based upon the lower of the sales price or the appraised value) and you need to make sure that your lender is okay with the amount of seller help being offered. For example, may sub-prime lenders will allow a 6% seller concession if you are putting 10% or more down, but only 3% if you are putting no money down, although some will allow 6% seller help in 100% financing. Also, check to see if your lender has restrictions on the types of closing costs they will let the seller pay for. Some lenders will only allow the seller to pay for “non-recurring” closing costs, such as points, but not for costs that recur, such as taxes and insurance.
5) Have the seller pay both sides of the transfer tax
Benjamin Franklin once said, “in this world nothing can be said to be certain, except death and taxes.” He probably wasn’t specifically referring to transfer tax, but paying it is definitely certain. Real estate transfer taxes are state and local taxes that are assessed on real property when ownership of the property is transferred between parties. Typically, the transfer tax is 1% of the sales price paid by the seller and 1% of the sales price paid by the buyer. However, I have closed loans on the same road, one with a 1% transfer tax per side and the other with a 1.75% transfer tax per side. That’s quite a difference! The reason for the discrepancy was that one of the properties was located within city limits, which had recently significantly increased their transfer tax rate. Ask the seller or your real estate agent to stipulate in the purchase contract that the seller will be paying both sides of the transfer tax. Not only will that save you quite a bit of money at closing, it is not considered to be a part of the seller concession and thus will not be included in the maximum seller help amount allowed by the lender.
As you can see, there are many ways to significantly reduce your closing costs. In refinances, negotiating with your broker or lender are the primary ways to do so. In purchase transactions, you have many more options. Work closely with your broker, real estate agent and seller to find the best deal that is satisfactory to you, the seller and your lender.
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