Understanding Lender Credits In Home Mortgages
One of the most common questions homebuyers have when taking out a mortgage is what lender credits are and what they can be used for. Knowing this information can help you make informed decisions about your home purchase and get the best possible deal. Let’s look at lender credits and how they can help you with your home mortgage.
What Are Lender Credits?
Lender credits are discounts offered by the lender that apply to closing costs and reduce the amount of money you pay at closing when purchasing a home. These credits help offset the total closing costs, such as appraisal fees, title fees, pre-paid interest, or even points that reduce your interest rate. Essentially, it’s an incentive from the lender to get you to use their services for your home loan.
Lender Credit Limit
You may be wondering if it is possible to get a lender credit large enough so that you don’t have to bring in any funds to buy a home. Unfortunately, the simple answer is no. The total amount of credits combined in a transaction, including lender, real estate agent, and seller credits, cannot exceed the total closing costs, meaning they can’t help cover the down payment.
Except for 0% VA financing and some down-payment assistance programs, you will have to pay for your down payment out of pocket. The minimum down payment amount required for FHA financing is 3.5% and 3% for qualifying conventional financing.
When Should You Use Lender Credits?
Lender credits are beneficial if you don’t have enough cash to cover all of your closing costs or if there are no other options to lower them (such as waiving impounds or negotiating with the seller).
However, it’s important to remember that while they may help lower the amount due at closing, they will typically increase the interest rate you are getting. Bear in mind that not all lenders offer lender credits, so it’s essential to do your research before deciding which lender is right for you.
What Are The Closing Costs And Expenses When Buying A Home?
Closing costs refer to any fees related to buying or refinancing a home that is not part of your monthly mortgage payment (such as principal and interest). These include but are not limited to discount points, appraisal fees, pre-paid interest, title search fees, transfer taxes, and survey fees.
Closing costs can vary significantly depending on the property location, the title company, the lender you use, or whether you wish to get an impounds account.
Other costs related to purchasing a home that are usually not a requirement by the lender, such as termite or roof inspections, can also affect the total closing costs. If these costs are paid for outside of closing, the lender credit will not be able to cover them.
What Are The Closing Costs That The Lender Charges?
There are different fees a lender or mortgage broker can charge you in exchange for their service. Some examples are discount points, origination fees, and processing fees.
- Discount points are upfront payments made in exchange for a lower interest rate over the life of the loan. These points are paid at closing and typically range from 0-3%. The amount paid will depend on the type of loan you’re getting and the current market conditions at the time of purchase or refinance. Generally speaking, paying discount points may be beneficial if you plan on staying in your home for several years since it could save you money over time due to lower monthly payments.
- Origination fees are paid directly to your lender or broker for their service.
- Processing fees (also known as underwriting fees) are paid to the lender for processing and underwriting your loan.
Lender Credits And “No-Cost” Refinances
Homeowners often refinance to lower their monthly payments or to access equity in their homes for other purposes, such as debt consolidation or home improvements. Closing costs on a refinance loan can range anywhere from 2% to 6% of your loan amount.
When considering whether or not to refinance, it’s important to factor in all associated costs, such as title fees, appraisal fees, origination fees, etc., so that you have an accurate picture of how much a refinance will cost overall before making a decision.
JVM Lending can often offer homeowners a “no-cost” refinance when interest rates improve significantly. A “no-cost” refinance allows you to refinance your home without paying any out-of-pocket money for your closing costs. It is an excellent option for homeowners short on cash or want to save money in the short term.
Even though you won’t be paying in cash for your “no-cost” refinance, closing costs do not simply disappear. Instead, they are paid through a different method: during a “no-cost” refinance, lenders will either cover closing costs by 1) increasing your interest rate or by 2) financing the closing costs into the loan amount.
How do Lender Credits Help Homebuyers?
Lender credits help homebuyers by lowering the amount of money they need to purchase a home by reducing their total closing costs. This means you will have more funds for other expenses, such as moving costs or furniture purchases.
How Will Lender Credits Affect My Mortgage Payments?
If you take advantage of lender credits, your payments will not change since the amount borrowed remains unchanged regardless of how much credit you receive from the lender.
That said, it’s important to understand that by taking a higher interest rate in exchange for those credits, your overall cost for borrowing still goes up since you’ll pay more in interest over time due to that higher rate. However, if you plan on staying in your home long enough, those extra costs may very well be offset by the initial savings provided by those credits when you close your loan.
Lender Credits Summary
In conclusion, understanding what lender credits are and how they work can help potential home buyers make informed decisions about their mortgage loans and save money over time. Lender credits provide an attractive option for people looking to buy or refinance a home while keeping more money in their pockets over the short term. With proper research and guidance from experienced professionals like JVM Lending’s team members, homebuyers should have no problem finding the right fit for their unique circumstances—and getting those all-important lender credits too!