Lender Credit For Closing Costs By Lender In Lieu Of Higher Rates

In this blog, we will cover how homebuyers can not pay out of pocket for closing costs and use seller concessions and/or lender credit. In general, most homebuyers do not have to pay closing costs out of pocket. Closing costs are generally paid with seller concessions and/or lender credit by the mortgage company.

Closing Costs On Home Purchase

All home purchase and refinance transactions come with closing costs. Lender credit is a credit from the mortgage lenders so borrowers can use it for closing costs. Lenders will charge a higher mortgage rate to the borrower for a lender credit. The higher the lender credit, the higher the premium on their rates. Lender credit cannot be used for the down payment. We will further discuss how lender credit works in the following paragraphs.

How Much Money Do I Need To Buy A House?

Homebuyers have two costs on home purchase:

  • Homebuyers are required to put a down payment on a home purchase with the exception of VA and USDA Loans.
  • Closing Costs.

On refinance transactions, there are closing costs.

Down Payment On Home Purchase

Down Payment is a fixed amount. FHA mortgage loans require a minimum of a 3.5% down payment and conventional loans normally require a minimum of a 5% down payment. Owner Occupant Conventional Loans require 3% for first-time home buyers and 5% for seasoned home buyers.

Closing Costs On Second Homes And Investment Properties

Second Home Financing requires a 10% down payment. Investment Home Loans require a 20% down payment. VA Loans and USDA Loans do not require down payment. Jumbo Mortgages Required 10% to 20% down payment. NON-QM and Bank Statement Mortgage Loans require a 20% down payment. Hard Money Loans require a 20% or more down payment.

How To Avoid Paying Closing Costs Out Of Pocket On Mortgage Transactions

Whether it is a purchase or refinance mortgage transaction, there are always closing costs. Besides the down payment are closing costs. Homebuyers are responsible for closing costs which can be as much or more than the down payment. However, there are ways to offset paying for closing costs. This is done by either getting a seller concession or getting a lender concession towards closing costs.

How Much Can Home Sellers Contribute Towards Closing Costs

Property sellers can contribute towards buyers closing costs by offering homebuyers a seller concession or seller contribution towards closing costs.

Property sellers can contribute towards buyers closing costs by offering homebuyers a seller concession or seller contribution towards closing costs. Sellers are allowed to contribute a maximum of 6% of the purchase price towards buyers closing costs on FHA Loans. VA allows up to 4% seller concessions. USDA permits up to 6% seller concessions. Owner occupant and second home conventional loans allow up to 3% seller concessions.

Seller Concession On Non-QM and Conforming Loans

Conventional Investment Home Loans allow up to 2% seller concessions. Non-QM Loans and Bank Statement Mortgage Loans allow up to 4% seller concessions. Jumbo Mortgages allow up to 3% seller concessions.

What Happens With Seller Concession Overages?

Any leftover proceeds cannot go to the buyer in the form of cash, credit and need to go back to the home seller. To avoid seller concession overages going back to the seller, overages can be used to purchase discount points to buy down mortgage rates.

Not Coming Up With Closing Costs On Home Purchase With Seller Concessions And Lender Credit

In the event, the home buyer cannot get a seller concession or seller contribution towards the buyer’s closing costs and the home buyer does not have funds besides the down payment, the home buyer can get a seller concession and/or lender credit or the combination of both towards paying for closing costs.

How Does Lender Credit Work By Mortgage Lenders?

How this works is for a higher mortgage rate, the mortgage lender will cover a set amount of funds and credit the mortgage loan borrower to cover the borrower’s closing costs.   Closing costs include title charges, transfer stamps, attorneys fees, inspection fees, appraisal fees, prepaid closing costs, and other third-party charges that are incurred in closing the mortgage loan.

Case Scenario Of How A Borrower Gets A Lender Credit To Pay For Closing Costs

Lender credit towards the home buyer's closing costs is very common for new home buyers who do not want to pay more than they have to but can afford the extra monthly payment.

For example, if a borrower is quoted a mortgage rate of 3.75% for an FHA loan, the borrower can get a lender credit of $5,000 (sample figure) towards closing costs of $5,000. This is done by getting a higher mortgage rate of 4.25%. Lender credit towards the home buyer’s closing costs is very common for new home buyers who do not want to pay more than they have to but can afford the extra monthly payment.

Using The Combination of Seller Concessions and Lender Credit For Closing Costs

There are many instances when the homebuyer gets a seller concession but the concession is not enough to cover all closing costs. In cases where the borrower is short of paying for closing costs with a seller concession, they can get a lender credit. Nothing in the mortgage business is free. Lender credit is not free. Mortgage companies will charge higher mortgage rates for a lender credit. 


Peter has 7+ years of experience in residential lending. He is a licensed Realtor in the Chicagoland area.