Is a Lender Credit a Good Idea?

Purchasing a home is exciting, but coming up with the money to cover all of its costs can be stressful. From the down payment to the closing costs, there’s a lot of money you’ll be expected to come up with out of pocket. Is a lender credit a good idea?

It’s true that closing costs typically are the most daunting for new homeowners because they come at the end of the process. It’s the same time you’re trying to budget for your move and juggle two housing payments. This is where the lender credit can come in to save the day but are there any drawbacks? Let’s take a look.

What is a Lender Credit?

Mortgage lenders have an option to apply what’s called a ‘lender credit’ to your loan to help you cover all or part of your closing costs. I can help cover costs such as mortgage insurance, homeowner’s insurance, property taxes, escrow fees, and title insurance, among others.

It’s important to note that a lender credit cannot be used for your down payment or any reserves.

Do I Have to Pay It Back?

Yes. A lender credit is not free money. In exchange for getting help with the closing costs, your interest rate will be increased. The percentage is typically very small, but you should be aware that it can add up over time. In the end, you’ll be paying more for the closing costs than you would have if you paid them upfront. For example:

• A mortgage lender gives you a $5,000 lender credit to help cover closing costs.
• Your interest rate is bumped up by 0.50%, which adds an extra $14.96 to your monthly mortgage payment.
• Over the life of a 30-year mortgage (360 months), that extra $14.96 a month adds up to $5,385.60.

The Bottom Line: Is a Lender Credit a Good Idea?

For some homebuyers, coming up with around $5,000 to close can be challenging. In that case, paying a little extra per month on your mortgage payment over time can be beneficial.

A lender credit can also make sense If you’re buying a home that you don’t plan on living in for too long, or you expect you’ll be refinancing at some point.

Alternatives to the Lender Credit

There are other options you can explore if you’re not sure about utilizing a lender credit.

• You can ask the seller to pay closing costs, which is very common. The closing costs are built into the sales price to allow for this concession.
• You can ask a relative to gift you the money to cover closing costs.
• There are programs designed to help low-income homebuyers (who meet specific requirements) with closing costs. You can reach out to local government or nonprofit housing agencies to discuss what’s available.

Also, if you have enough lead time before you plan on buying, you can save up additional funds that you can earmark to cover the closing costs.

Got Questions?

At National Home Loans, we’re happy to help answer any questions you may have about home loans and encourage you to contact us. Our home loan specialists are standing by!