Is the APR Reduced If the Home Seller Pays the Fees?
August 7, 2006, Revised January 5, 2008
Lender fees must be included in the APR when they are paid by a home seller. The borrower pays the fees indirectly in the house price.
"My boss tells me that fees ordinarily included in the APR, such as points, when paid by the home seller, must nevertheless be included in the APR. I don't understand this since I thought that the APR allows the consumer to compare the cost of doing business with one lender versus another lender? Since fees paid by the seller don’t affect the borrower’s cost, why should they be included in the APR?"
Your boss is right, and the rule that lender fees should be included in the APR even when paid by a home seller, is also right.
Strictly speaking, the APR measures not what the borrower is paying, but what the lender is charging. Who pays the charge is not relevant. The general presumption is that the borrower pays it, directly or indirectly. If the home seller pays it directly, the borrower pays it indirectly in the price of the house.
Involvement of a third party in the transaction does not affect the comparability of the APR in comparing the cost of borrowing at different lenders. The willingness of a seller to pay some specified amount of loan fees to get his home sold is not limited to a particular lender. If they pay it for lender A, they will also pay it for lender B. Hence, such payment does not affect the integrity of the APR as a measure of the cost of funds.
Which is not to say that borrowers can always rely on the APR, because often they can't. See Questions About the Annual Percentage Rate (APR).
Lender fees must be included in the APR when they are paid by a home seller. The borrower pays the fees indirectly in the house price.
"My boss tells me that fees ordinarily included in the APR, such as points, when paid by the home seller, must nevertheless be included in the APR. I don't understand this since I thought that the APR allows the consumer to compare the cost of doing business with one lender versus another lender? Since fees paid by the seller don’t affect the borrower’s cost, why should they be included in the APR?"
Your boss is right, and the rule that lender fees should be included in the APR even when paid by a home seller, is also right.
Strictly speaking, the APR measures not what the borrower is paying, but what the lender is charging. Who pays the charge is not relevant. The general presumption is that the borrower pays it, directly or indirectly. If the home seller pays it directly, the borrower pays it indirectly in the price of the house.
Involvement of a third party in the transaction does not affect the comparability of the APR in comparing the cost of borrowing at different lenders. The willingness of a seller to pay some specified amount of loan fees to get his home sold is not limited to a particular lender. If they pay it for lender A, they will also pay it for lender B. Hence, such payment does not affect the integrity of the APR as a measure of the cost of funds.
Which is not to say that borrowers can always rely on the APR, because often they can't. See Questions About the Annual Percentage Rate (APR).