Zero Closing Costs

When the Seller Pays the Closing Costs

The VA establishes limits to seller paid closing costs. But regardless of how much the seller is asked to pay, they are giving up bottom line, net proceeds from their home sale.  This is money directly out of their pocket.  The seller obviously doesn’t like this.  There are only two reasons they will accept your terms, requesting ANY closing costs to be paid by the seller:

Reasons Sellers Will Agree to Pay Closing Costs

It’s not uncommon for a VA Loan Professional and a real estate agent to clearly communicate the need to have closing costs paid for the VA buyer through escrow on a purchase transaction.  They both understand this need up front, before any offer to purchase is made, and the lender clearly communicates this to the Veteran, so every one is on the same page.

When the offer is made, the Selling agent representing you, the VA buyer, must assess the willingness of the seller to concede funds to the buyer.  

Reason #1:

In a “hot seller’s market,” when there exists low inventory of homes for sale, the answer will be “NO,” and your agent should know this, if the home is priced right.  In this situation, offering MORE than the listing price, then including an offsetting request to pay for the buyer’s closing costs is a common technique.  This may result in an accepted offer.  However, the higher contract price must be justified by recent comparable sales for the VA appraiser to achieve the desired sales price as an appraised value.  The VA appraiser will we aware of and note the seller concession.

Reason #2:  

If it’s not a “hot seller’s market,” if the market is “balanced,” or if there exists a substantial inventory of homes for sale, the market conditions could be described as a “Buyer’s market.”  In this case buyers have the advantage, because there are too many sellers. This is an ideal condition for a VA home buyer. The seller will likely be willing to concede funds and accept the buyer’s terms, requesting closing costs to be paid.

Here Comes The Zero Down, Zero Closing Cost Mortgage Lender

Not all lenders are this flexible, but getting your VA lender to design a zero down home loan with zero closing costs is common for Veterans using their VA loan.

In every transaction at SoCal VA Homes, our experienced team of Sr. VA loan professionals present options to our clients where we as the lender pay some or all of your closing costs.  

The “Technical” Truth About a No Closing Cost Mortgage

How is this achieved? How can the VA lender afford to pay for everything, resulting in no closing costs to you?  This deserves a technical explanation, so here we go…

VA lenders are often willing to contribute funds towards your closing costs, as the interest rate offered to you increases. Contrary to most beliefs, lenders don’t typically earn more by delivering a higher interest rate.  That’s because the lender credits funds directly to you in escrow which offset any additional earnings from the higher interest rate. For an explanation of where these funds come from (at higher rates), we suggest you read selected chapters from our book on Amazon, Avoiding Mistakes & CRUSHING Your Deals Using Your VA Loan.

However, there are limits to how high a VA lender will go when offering you incremental increases in contributed closing costs.  Your credit score can be a dampening factor, shrinking the amount a VA lender can offer toward your closing costs. By and large, VA loans and VA lenders present a “risk adjusted” rate and fee structure.  This means that lower credit scores presents a higher risk of default which inhibits the ability of a lender to offer increasingly larger amounts to pay for closing costs.

Finally, Wall Street has a significant impact on the ability for VA lenders to offer concessions to you at increasingly higher rates.  Over the decades, due the ability for Veterans to easily refinance using the VA IRRRL – VA Streamline refinance program, we have witnessed Wall Street getting stingy!   

Wall Street is the conduit or “broker” between all the VA lenders, who sell their loans and the investors who ultimately buy and own these loans.  (Note: This is a separate transaction from selling the loan servicing rights, changing the company that collects your payments.) Wall Street packages huge “pools of loans” into investments, known as a Ginnie Mae securities, also known as mortgage backed securities or mortgage bonds.    

This is the process known as securitization.  All FHA & VA loans end up packaged together for sale to large pension funds, foreign governments and other managers of enormous amounts of capital.

Why is this relevant to lenders helping me get my no closing cost mortgage?

It’s very important because the funds to credit to you into escrow to pay for your closing costs come from Wall Street.  As an example: Prudential Insurance buys 100MM in mortgage bonds, and they pay Morgan Stanley (Wall Street). As Morgan Stanley creates the GNMA securities, Morgan Stanley pays Wells Fargo, Quicken Loans or SoCal VA Homes for the funded and closed VA loans.  Depending on how much Morgan Stanly is willing to pay, VA lenders such as SoCal VA Homes can offer some of that “future income” when we present our interest rate options to you.  

That’s how the flow of capital makes its way directly into the title company, credited to your escrow, in your transaction.  It’s all about the anticipated income as the loan sale goes up the food chain!

Even Wall Street Has Its Challenges

Enough of the technical stuff, here’s the challenge.  Wall Street has seen the explosion of VA loans since 2008, up nearly 600% in volume!  And Wall Street knows that the VA IRRRL program – the VA Streamline refinance have the propensity (and the history) of rapidly paying off loans that are “on the books” – loans that you are making your payment on.

If you pay off your loan earlier that Wall Street has hoped for, then the investment doesn’t perform as expected.  Bottom line…Wall Street now has a lot more data on the likelihood for VA loans to pay off, and they don’t like what they have witnessed over the years.  

Bottom, bottom line…Wall Street isn’t paying as much as they used to for higher rates, as they did in say 2013, for closed VA loans.  They have become smarter AND more frugal – stingier!

As a result, VA lenders have been less able to contribute towards your closing costs, because Wall Street has removed the larger profit margins when selling loans at higher interest rates.  VA lenders used to be able to just move your rate higher (and higher) and get paid incrementally more to sell those loans at the higher rates.  

We would then pass on larger (and larger) closing costs credits to you, right into escrow.  Wall Street no longer profits from those higher rate loans because they get paid off too quickly.  So the larger amounts of closing cost credits available to you at the higher rates have disappeared to a degree.  And the VA rates in 2020, in the aftermath of the COVID Mortgage crisis, have been no exception...very challenging!

Yes, that’s a long explanation…but that’s the reality – that’s the capital markets at work!

To achieve your no money down home loan with your VA benefit and combine that with a no closing cost option for your VA loan can is common with SoCal VA Homes.

To speak with a Client Service Specialist about zero closing cost options or answer any other questions, call 949-268-7742 today.

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