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What Is A Lender Credit For Home Purchase Closing Costs

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What Is A Lender Credit For Home Purchase Closing Costs

This BLOG On What Is A Lender Credit For Home Purchase Closing Costs Was UPDATED On May 14th, 2019

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 lenders use the zero closing costs advertisement for home buyers and homeowners looking to refinance
  • 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 financial institutions with deceptive advertising
  • The agency sets strict rules and regulations for lenders to make sure that there is no deceptive advertising
  • Deceptive advertising and lending violations still exist
  • Takes time for the CFPB to crack down
  • For example, here is a case scenario:
  • This practice is illegal
  • But home builders are still doing it throughout the country
  • Lenders cannot give a kickback to a home builder
  • This is because this is a RESPA violation
  • Considered a felony and is also classified as mortgage fraud

Costs Required To Purchase Home

There are two types of costs involved when purchasing a home:

  • Down payment
  • 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 loan transactions have closing costs
  • However, home buyers do not have to pay for closing costs if they have a sellers concession or a lender credit by lender
  • Lender credit is when the lender will give credit to a borrower to cover part, most, or all of the closing costs

What Is A Lender Credit: False Advertisement

Most consumers have seen countless commercials on lenders advertising offering no closing costs. Many lenders advertise there are no closing costs. Lenders will cover closing costs on a home purchase and/or refinance transactions:

  • Most consumers think mortgage companies are paying for all of the closing costs associated with their home loan
  • They feel like they are getting a major deal.
  • Closing costs on loan transactions are not cheap
  • Can easily be 2% to 5% of the loan amount
  • Can easily add up to several thousand dollars
  • One of the major things that the commercial does not say is that the credit is not free
  • That all lenders can offer a credit
  • BUT the only way lenders offer credit is in lieu of a higher mortgage interest rate

How Does It Work?

The way lender credits works is when the lender offers a cash credit to their clients. They do this so the borrower can pay for the closing costs on purchase and/or refinance loans.

  • This cash credit lender offers is not free
  • In lieu of the cash credit lender offers, a lender will charge borrowers a higher interest rate
  • For example, here is a case scenario:
    • the lender may offer a cash credit of $3,000
    • the borrower can use that money towards closing costs on their home loan
  • Examples of closing costs are the following:
    • title charges
    • recording charges
    • transfer stamps
    • attorneys fees
    • loan origination fees
    • first-year homeowners insurance fees
    • flood insurance premium, points
    • 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
  • 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 buyer’s closing costs of their home purchase.

  • Again, sellers are not giving the buyer a sellers concession for free
  • Everything is calculated
  • For example, here is a case scenario:
    • if the seller needs a bottom line sales price of $100,000
    • they can inflate the price of their home to $105,000
    • sell it to the home buyer with a $5,000 sellers concession towards the home buyer’s closing costs
    • the $5,000 can cover part or most of the home buyer’s closing costs

With a Lender Credit, the lender may offer a $5,000 Lender Credit if the 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
  • 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 lender credit
  1. Gustan Cho, NMLS 873293 says

    Not all lenders offer lender credit. Mortgage companies with higher rates cannot offer lender credit. Lenders with lower rates can offer lender credit in lieu of higher mortgage rates.

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