Lender Credit Explained
Lenders Advertising No Closing Costs Due To Lender Credit
There are fees and costs involved on a home purchase mortgage loan as well as a refinance mortgage loan. On a home purchase, the home buyer needs to come up with a down payment for the home purchase. Minimum down payment requirements differ depending on the mortgage loan program the home buyer chooses. FHA Loans require a 3.5% down payment, Conventional Loans require either a 3% or 5% down payment on a home purchase, and USDA and VA Loans do not require any down payment. Down payment on a home purchase is mandatory by mortgage lenders and you cannot use a sellers concession or lender’s concession towards the down payment on a home purchase. Gift funds for down payment is allowed on FHA Loans and Conventional Loans.
What Are Closing Costs?
Every mortgage transaction has closing costs. Whether it is a home purchase or refinance mortgage transaction, there are closing costs the mortgage borrower is liable for. A home buyer definitely needs to come up with the down payment on a home purchase. However, there are ways where a home buyer does not have to come up with the closing costs on a home purchase. Closing costs needs to be paid by the mortgage borrower. On a home purchase transaction, closing costs can be paid if the home buyer gets a sellers concession by the home seller to cover part or all of the home buyer’s closing costs. Sellers concessions cannot be used towards the down payment on a home purchase. Any sellers concession overages needs to go back to the home seller and the home seller cannot give the seller concession overage to the home buyer in a form of cash or other kickback so home buyers need to be careful and not ask for too much in sellers concessions. Overages in sellers concessions can be used to purchase points and buy down the mortgage rates. Sellers concessions can also be used to pay for the upfront FHA mortgage insurance premium instead of rolling the upfront FHA MIP into the FHA Loan balance.
Examples of closing costs are title charges, recording charges and fees, transfer stamps, credit report fees, origination fees, processing fees, underwriting fees, doc fees, attorneys fees, pre-paids ( escrow for two months insurance and two months of property taxes), one year homeowners insurance premium, flood insurance premium, appraisal fees and other inspection fees, and any other third party costs and fees the mortgage loan borrower can be charged in the home buying process.
Home buyers who for one reason or another reason cannot get a sellers concession to cover their closing costs, they can get a lender credit to cover their closing costs. We will discuss what a lender credit is and how lender credit works on the next paragraph.
What Is A Lender Credit To Cover Closing Costs?
A mortgage lender can offer a lender credit to the mortgage borrower to cover the mortgage borrower’s closing costs. Many mortgage lenders will advertise that by choosing them that the mortgage lender will cover all closing costs for the mortgage borrower. All banks and mortgage lenders can offer a lender credit to all mortgage loan borrowers to cover the borrower’s closing costs. This type of advertising is often misleading because mortgage loan borrower’s think that by choosing the lender that offers no closing costs via advertisement that they are getting a deal of a lifetime. You often see ads by mortgage lenders that they will pay for the home buyer’s home appraisal if you choose them and that they will pay for all of the borrower’s closing costs. This is true but all lenders can offer a lender credit and the borrower can pay most or all of the closing costs with a lender credit. However, one thing that these mortgage lenders do not tell you is that if the mortgage lender offers you a lender credit for closing costs, the mortgage rates you will get will be much higher than the par rate that you will get if you were to pay the closing costs yourself. Many times, a lender credit will jack up a mortgage interest rate by 0.50% percentage points where you will pay tens of thousands of dollars over the course of a 30 year fixed rate mortgage loan for just getting a few thousand dollar in a lender credit. There is no free lunch in the mortgage business and any bank or mortgage company can give you a lender credit in lieu of a higher mortgage rate.