Lender credit, explained

Whether you’re looking for ways to help make homeownership a reality or you’re simply interested in expanding your toolkit of mortgage knowledge, lender credits may be worth the investigation. Let’s grab a magnifying glass and jump right in.

What is a lender credit?

A lender credit is a way borrowers can get help from their lender for closing costs. In exchange, the borrower accepts a higher interest rate. Although they are paying less upfront, due to the higher interest rate, they typically have a higher monthly mortgage payment.

Do note that the term "credit" may differ depending on the lender. They may associate different meaning with "credit" depending on the circumstance. For example, some lenders offer lender credits that aren’t connected to the borrower’s interest rate.

For the purpose of this article, we will be discussing lender credits that are connected to closing costs. If you’re interested in pursuing lender credit, be sure to clarify what you’re looking for with your lender.

Lender credit for closing costs

A borrower may be interested in lender credits if they are concerned about paying all of the closing costs upfront. Closing costs are the various fees and expenses associated with finalizing a real estate transaction. They typically cover things like appraisal fees, inspections and title work — whether you’re buying a home or taking out a loan. Closing costs are a significant part of the homebuying journey.

When a lender gives you a credit, they’re essentially providing funds that can be used to help offset these expenses. This means that a portion of your closing costs are covered by your lender, helping to reduce the immediate financial outlay required from you.

How are lender credits determined?

Lender credits are determined by the lender and may not be offered. The exact increase in your interest rate will typically depend on the lender, the kind of loan you have and the overall housing market. A loan with a 1% lender credit at one lender, for example, may not have the same rate as the same loan at a different lender — each lender has their own way of determining how interest rate impacts the credit.

Lender credits vs. discount points

Now that you know what a lender credit is, how does it differ from discount points? Discount points, also known as mortgage points, allow the customer to pay for a lower interest rate, which is also known as buying down the rate. By paying for mortgage "points," the borrower pays more upfront but will ultimately receive a lower interest rate and pay less in the long term. Points may be worthwhile if you are comfortable paying more upfront and plan on keeping your loan for enough years to make the tradeoff worth it.

Are lender credits a good idea?

Whether lender credit is a good idea will depend on your personal circumstances. However, there are some general pros and cons worth considering:

Lender credit pros

• Reduced upfront costs.
• Better suited for a short-term mortgage due to the likely increase in monthly payments.
• Potentially more approachable path to homeownership for some due to reduced upfront costs.

Lender credit cons

• Higher interest rate.
• Potentially less savings or financial liquidity month-to-month.
• May not benefit a long-term financial strategy.

In summary

Lender credits offer a unique way to manage closing costs on a mortgage. Like any financial strategy, lender credits come with a tradeoff. In exchange for offsetting your closing costs, you are committing to a higher interest rate, higher monthly mortgage payments and more money spent in the long term depending on how long you plan on staying in your home. However, a lender credit can reduce upfront costs and may help make the path to homeownership more achievable for some.

Lender credit FAQs

Can a lender credit be used for a down payment?

Lender credits are financial credits given from the lender to the borrower to help offset upfront costs like down payments in exchange for a higher interest rate.

How to get a lender credit?

If you’re interested in lender credits, discuss this option with a home lending advisor during the mortgage application process. Do note that, depending on the lender, the process and way of calculating a lender credit may differ.

How much lender credit can I get?

The overall amount of lender credits will depend on the lender, the borrower and the type of mortgage product in question.

Are lender credits negotiable?

Lender credits may be negotiable depending on the lender. The degree of negotiation can vary based on market conditions, the borrower, the lender and the loan product.