What Are Lender Credits Used For When Buying A House?

If you’re considering purchasing a home soon, you’ve likely realized how expensive the housing market is. Although VA loans don't require a down payment, many veterans put money down to offset their monthly costs. The average down payment amount is 6% currently. Even if you opt for the 0% down option, your cash to close, i.e., the amount you pay before you get the keys, is no small chunk of change. On a $500,000 purchase, you could be looking at tens of thousands of dollars in cash to close, not including the VA funding fee. So, how can buyers lessen or eliminate some of these painful closing costs? Lender credits may be the answer. Keep reading about these special credits and how they can make home ownership more affordable. 

What Is A Lender Credit?

While 0% down loans may lead you to believe you need $0 to snatch up a new home, that's simply not the case. While VA loans require $0 for a down payment, they still come with closing costs like: 

  • Origination fee
  • VA funding fee
  • VA appraisal fee
  • Credit check fee
  • Title search and title insurance costs
  • Hazard insurance
  • Real estate taxes
  • Recording fee

During the final stretch of your loan process, your lender will tally up all of these fees and present them as closing costs.  Closing costs equate to an average of 3 – 6% of your total loan value. This is where a lender's credit has advantages.

A lender credit is where your lender pays some of your closing costs for you. While a lender credit means you pay less out of pocket during closing, it also raises your interest rate, meaning you’ll pay more over the life of your loan. 

Lender credits are determined based on a percentage of your loan amount, and most lenders cap credits at a specific dollar amount. Lender credits show up on your Closing Disclosure documents. 

Lender Credits Vs. Discount Points

While lender credits and discount points are terms that get used interchangeably, they represent opposite concepts. Paying mortgage points involves paying more upfront to get a lower interest rate. Lender credits involve paying less up front but more in interest. 

Mortgage points make sense if you plan to live in your home long-term and want to have a lower payment in the event of a rainy day, while lender credits make more sense for short-term homes. 

Should I Get A Lender Credit? 

Lender credits can be a great way to offset how much cash you need to fork at closing; however, there are several caveats to consider. Firstly, it’s important to remember that lender credits aren’t free money. Lender credits raise your interest rate, which means you pay more over the life of your loan. While the increased interest rate may only equate to $20 or $30 per month, you may be paying thousands more over the life of the loan. You should consider a lender credit in these circumstances: 

  • You want or need to pay less upfront to your lender
  • It will help you to buy a home sooner and stop renting 
  • This is your first home and not your forever home 
  • You plan to sell in a few years 

Ultimately, if the upfront savings offered by a lender credit levels out with the long-term cost, you’ve reached a “break-even point,” and the credit was “worth it.”

What Other Options Do I Have?

If you’ve determined that a lender credit isn’t a wise decision, you can still find other ways to save on your home purchase. Seller concessions are a great example. In some cases, you can negotiate to have the seller pay a portion of your closing costs. Sometimes, if a seller is eager to seal the deal, they may be willing to pay a part of your closing costs or lower the final selling price.

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Find Out Which VA Loan Works Best For You

VA Loans are available exclusively to veterans and military families in America. There are many different loan types available to you. Once you know more about the process and the loan best suited for your needs, we can help guide you through the rest of your home buying journey.

Learn more about VA loans here.