Is a Lender Credit Right For You?
In an ideal scenario, the perfect house shows up when you are ready and have the cash flow to cover the down payment, closing costs, and first month’s mortgage. However, this isn’t always the case. If crunching the closing cost numbers is beyond stressful, rather than missing the opportunity to buy now, you might see if a lender credit could make it happen.
What is a Lender Credit?
A lender credit is also called a lender assist, though you may want to sit down with your mortgage broker to more solidly understand the verbiage he/she uses. What is a lender credit? Essentially, as a borrower, your lender could agree to credit closing costs. For instance, you might find a great house in March, but were really only going to be financially up to the task in June.
This doesn’t mean that you get away scot-free from paying the closing costs, you just don’t pay for them up front. When a lender agrees to credit your closing costs, it is usually at the price of a slightly higher interest rate. In other words, you (the borrower) will have to pay back the costs over the life of the loan.
Ultimately a lender assist is a possibility that offers a short-term solution but could end up being more expensive long-term. If you agree to a higher rate to get that lender credit, your mortgage broker should (and likely will) also chart how much higher your monthly payment will be in contrast to the credit you receive.
That stated, home buyers must usually pay between about two to five percent of the purchase price of their home in closing fees. So, if your home cost $250,000, you might pay between $6,000 and $15,000 in closing costs.
If you just can’t get there on your own, just like in a great football game where a few passes help to score the winning touchdown, an assist may be just what you need. It may still be worthwhile if you anticipate being in the home for a while and don’t want to miss the opportunity to buy it.
FAQ About Lender Credits
Still have questions about lender assists? To shed more light, expert Greg Roth, AMG Team Senior Loan Officer for the Approved Mortgage Group, answers these common questions.
Is a Lender Credit the Same as Lender Assist?
A lender credit is when the mortgage lender gives the buyer some cash towards their closing costs. Similar to a seller assist the total amount of lender credit must never exceed the total amount of closings costs.
Some lenders will give a lender credit as an incentive for a buyer to go with them when they are shopping around for their mortgage. Other times the lender will let a buyer know that if they take a slightly higher interest rate they can provide the buyer with a lender credit.
This is helpful for buyers that are short on cash for closing but have low debt ratios and can handle the slightly higher monthly payment that comes with the higher rate.
Example: an interest rate of 4.5 with no credit and Principal & Interest Payment = $1200. Or you could raise the rate to 4.750% to get a $1500 lender credit. Your new monthly payment = $1250. $50/$1500= 30 months of making the higher payment to break even with the lender credit received. After that point, your payment would continue to be the $50 higher.
Why are Closing Costs So High?
Contrary to popular belief very little of closing costs associated with a loan are mortgage lender costs. Many buyers are shocked when they find out that their closings costs are more expensive than their required down payment. The biggest sections of closing costs are as follows:
- Prepaid Expenses: Typically, enough is collected to cover 12 months’ worth of property taxes as well as the full homeowners’ insurance policy
- Transfer Taxes: This is the cost (tax) associated when a property in PA changes hands. The buyer can expect to pay a bit over 2% of the purchase price in Philadelphia and 1% of the purchase price in most suburban locations.
- Title Insurance & Fees: Title insurance is required to protect the Lender and you against legal defects in the chain of title. The Lender will require you to get title insurance sufficient enough to cover the loan amount to protect them. It also encourages you to take out a separate Owners Title Insurance policy to protect your own interests.
Is it Possible to Use a Lender Credit for a Down Payment?
Both Lender Credit and Seller Credit can only be used towards closing costs and can’t be used towards any portion of a required down payment
Could You Use a Credit Card to Help Pay Closing Costs?
Some instances vary from lender to lender but typically the appraisal is the only closing cost fee allows to be paid via credit card.
Who Makes a Good Candidate for a Lender Credit?
This certainly varies from person to person. Anyone can get a lender credit if they want to take a higher rate to get a credit towards closing costs. We also try our best to give Veterans a lender credit as a thank you for their service. Many repeat customers will also get a lender credit as a thank you for their repeat business.
What’s Your Bottom Line?
We all have a bottom line. You may find that despite the creative accounting, it isn’t going to work long-term, and all that calculation helped you come up with another option. Or, you may decide to go all in. It’s your dream home and all you needed to make it happen was a lender assist. Whatever you decide, talk it over with your mortgage broker, who knows your financial situation and could walk you through the numbers on your spreadsheet.