What Is A Lender Credit For Home Purchase Closing Costs

This Article Is About What Is A Lender Credit For Home Purchase Closing Costs

There are two types of costs involved when buying a house.

  • The down payment on a home purchase
  • Closing costs

The down payment is a fixed percentage amount.

  • The down payment depends on the loan program
  • For example, FHA requires 3.5% and conventional loans require 3% to 5% down payment on a home purchase
  • VA and USDA loans do not require any down payment
  • Closing costs can normally be covered by sellers concessions from the home seller
  • If the seller concession is short or there are no sellers concessions, the lender can give a lender credit so the borrower does not have to pay closing costs out of pocket
  • Lender credit is a credit given to the borrower by the lender in lieu of a higher interest rate
  • Lender credits can only be used for closing costs. Cannot be used for the down payment on a home purchase

How Does Lender Credit Work

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.

Deceptive Advertisement Of No Closing Costs

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 crackdown

For example, here is a case scenario:

  • it is illegal for home builders steering homebuyers to preferred lenders
  • the home builder will tell a buyer that they will only get a builder’s incentive or builder’s credit towards closing costs only if they use the preferred lender builder recommends
  • 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

In this article, we will cover and discuss lender credit to cover closing costs.

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.

False Advertisement Where Company Says The Lender Pays 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

What Are Examples Of Closing Costs

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.

What Is A Lender Credit Versus Sellers Concessions? Which Is Better

What Are Examples Of Closing Costs

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

Case Scenario On What Is A Lender Credit

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
  • Multiply 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.

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