What Is A Lender Credit?

What Is A Lender Credit?

What is a lender credit? Many home buyers see advertisements on television or get mailers by many mortgage lenders offering no closing costs on their home purchase and/or their home refinance mortgage loan. Banks and mortgage lenders use the zero closing costs advertisement for home buyers and homeowners looking to refinance and many times, consumers think that they are getting a major deal where they have to pay zero closing costs. The CFPB, Consumer Financial Protection Bureau, is the government regulatory agency that was created to enforce mortgage lenders with deceptive advertising and sets strict rules and regulations for mortgage lenders to make sure that there is no deceptive advertising.  Deceptive advertising and mortgage lending violations still exists but takes time for the CFPB to crack down. For example, it is illegal for home builders steering home buyers to preferred lenders where the home builder will tell the home buyer that they will only get a builder’s incentive or builder’s credit towards closing costs only if they use the preferred lender that the home builder recommends. This practice is illegal but home builders are still doing it throughout the country. Mortgage lenders cannot give a kickback to a home builder because this is a RESPA violation and considered a felony and is also classified as mortgage fraud . There are two types of costs involved when purchasing a home. The down payment and closing costs. All mortgage loan programs, with the exception of VA Loans and USDA Loans, require a down payment. VA Loans and USDA Loans offer 100% financing and no down payment is required.  All home purchase transactions and refinance mortgage loan transactions have closing costs. However, home buyers do not have to pay for closing costs if they have a sellers concession by the home seller or a lender credit by the mortgage lender. A lender credit is when the mortgage lender will give a credit to the mortgage borrower to cover part, most, or all of the closing costs on closing their home loan.

What Is A Lender Credit: False Advertisement

Most consumers have seen countless of commercials on mortgage lenders advertising that if you choose that lender that there are no closing costs because the mortgage lender will cover the closing costs on your home purchase and/or refinance mortgage loan transaction. Most consumers think that the mortgage lender is paying for all of the closing costs associated with their home loan and like they are getting a major deal. Closing costs on a mortgage loan transaction is not cheap and can easily be 2% to 5% of the mortgage loan amount which can easily add up to several thousand dollars. One of the major things that the commercial does not say is that the lender credit is not free and that all mortgage lenders can offer a lender credit BUT the only way lenders offer lender credit is in lieu of a higher mortgage interest rate.

What Is A Lender Credit And How Does It Work?

The way a lender credit works is when the mortgage lender offers a cash credit to the mortgage borrower so the borrower can pay for the closing costs of either their home purchase mortgage loan or their refinance mortgage loan. This cash credit the mortgage lender offers is not free. In lieu of the cash credit the mortgage lender offers, the mortgage lender will charge the mortgage borrower a higher mortgage interest rate. For example, a mortgage lender may offer a cash credit of $3,000 to the mortgage borrower so the borrower can use that money towards closing costs on their home loan. Examples of closing costs are title charges, recording charges, transfer stamps, attorneys fees, loan origination fees, first year homeowners insurance fees, flood insurance premium, points, and any other third party costs and fees associated with the origination and closing of their mortgage loan. A Lender Credit can only be used to offset closing costs and cannot be used for the down payment of a home purchase.

Sellers Concessions Versus Lender Credit? Which Is Better

A sellers concession is when a home seller offers a home buyer a cash credit towards the home buyer’s closing costs of their home purchase. Again, home sellers are not giving a home buyer a sellers concession for the Hell of it and for free. Everything is calculated. For example, if a home seller needs a bottom line sales price of $100,000 of their home, then they can inflate the price of their home to $105,000 and sell it to the home buyer with a $5,000 sellers concession towards the home buyer’s closing costs where the $5,000 can cover part or most of the home buyer’s closing costs.

With a Lender Credit, the mortgage lender may offer a $5,000 Lender Credit if the mortgage borrower agrees to pay a 0.50% higher mortgage interest rate. A $5,000 Lender Credit at 0.50% higher rate will cost a mortgage borrower $14.96 per month where you multiple it by 360 months, which is a 30 year fixed rate mortgage, it will cost a total of $5,385.41.  Getting a sellers concession for the home buyers closing costs is much better recommended to the home buyer rather than getting a mortgage lender credit.

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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