When we have buyers who are very tight on cash, we usually recommend a lender credit for closing costs. This is especially the case in competitive markets where seller-credits are non-existent.
B/c non-recurring and recurring closing costs can exceed $10,000 or $15,000, lender credits can often save deals for cash-starved borrowers.
Buyers need to understand, however, that lender credits come with higher rates. Lenders get more yield premium when they sell loans with higher rates, and they share that premium with buyers as a lender credit.
For a buyer with a $500,000 FHA loan, an increase in the interest rate by 3/8% can provide a lender-credit in excess of $10,000. The increase in rate will push the payment up by about $110 per month (in today’s rate environment), but that seems like a small price to pay for such a large credit. In addition, borrowers can refinance into a lower rate six months after they purchase.
For a $500,000 conventional loan, we might have to increase the rate by 1/2% to offer a $10,000+ credit, but even that rate increase only pushes the payment up by about $150 per month.
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